The average 30-year fixed mortgage rate rose to 7.28% this week, up sharply from 7.03% a week earlier.
Mortgage rates have now increased for four consecutive weeks, climbing from 6.71% in early September as Treasury yields moved higher.
The Federal Reserve’s September rate increase and persistent inflation concerns are helping keep borrowing costs elevated, making homes less affordable even where prices have softened.
Mortgage rates moved sharply higher this week, delivering another setback to prospective homebuyers who had been hoping borrowing costs would retreat this fall.
Freddie Mac reported Thursday that the average rate on a 30-year fixed-rate mortgage climbed to 7.28% as of Oct. 1, up from 7.03% last week. A year ago, the average rate was 6.34%.
The average rate on a 15-year fixed mortgage also increased, rising to 6.60% from 6.42% a week earlier. A year ago, the 15-year rate averaged 5.55%.
The latest increase continues a rapid reversal from earlier in September. The average 30-year rate was 6.76% on Sept. 10 and rose to 6.95% on Sept. 17 and 7.03% on Sept. 24 before reaching 7.28% this week.
That means mortgage rates have risen by more than half a percentage point in just three weeks.
“With mortgage rates on their current trajectory, the housing market continues to be supported by favorable economic conditions,” Freddie Mac Chief Economist Sam Khater said in releasing the latest survey.
Why mortgage rates are rising
Mortgage rates aren't set directly by the Federal Reserve. Instead, they tend to move with longer-term bond yields, particularly the yield on the 10-year Treasury note, because investors compare mortgage-backed securities with Treasury securities.
Those Treasury yields have been moving higher.
Treasury Department data show a significant increase in longer-term government borrowing costs during September. The 10-year Treasury yield rose from 4.83% on Sept. 9 to 5.18% on Sept. 24 and 5.29% on Sept. 30.
One factor has been renewed concern about inflation and how long interest rates will need to remain elevated.
At its Sept. 16 meeting, the Federal Reserve raised its benchmark federal funds rate by a quarter percentage point, putting the target range at 3.75% to 4%. The Fed said economic activity was expanding at a solid pace but that inflation remained elevated.
That matters to mortgage borrowers because expectations about future inflation and Fed policy influence Treasury yields and the mortgage-backed securities market.
The Fed's action doesn't automatically produce an equivalent increase in mortgage rates. But when bond investors expect inflation or interest rates to remain higher for longer, yields on longer-term bonds can rise, pulling mortgage rates along with them.
A significant difference for buyers
Even seemingly small changes in mortgage rates can have a noticeable effect on monthly housing costs.
For example, a buyer borrowing $400,000 with a 30-year fixed mortgage at roughly 7.03% would have a principal-and-interest payment of about $2,670 a month. At 7.28%, the payment rises to roughly $2,740 — around $70 more each month, before property taxes and homeowners insurance.
Compared with the 6.34% average rate available a year ago, the difference is considerably larger.
The increase can also reduce the price of the house a buyer can afford. Borrowers trying to keep their monthly payment within a fixed budget may have to make a larger down payment, buy a less expensive home or wait for rates to decline.
The housing market's rate problem
Higher mortgage rates have another effect: They discourage some existing homeowners from selling.
Millions of homeowners obtained mortgages when rates were considerably lower, and selling their homes could mean giving up a low-rate loan and replacing it with one above 7%. That so-called mortgage rate lock-in effect can limit the number of homes coming onto the market.
At the same time, higher borrowing costs can reduce demand because fewer prospective buyers qualify for a mortgage or can afford the monthly payment.
Freddie Mac's survey represents conventional, conforming home-purchase loans made to borrowers with excellent credit who put 20% down, meaning individual borrowers may receive rates that are higher or lower depending on their credit score, down payment, loan type and lender.
For consumers who are ready to buy, comparing offers may be particularly important when rates are volatile. Mortgage rates and fees can vary among lenders, and obtaining several loan estimates can reveal differences that translate into significant savings over the life of a loan.
The recent increase also means buyers should be cautious about assuming rates will quickly return to the levels seen earlier this year. As long as inflation concerns keep longer-term Treasury yields elevated, mortgage rates could remain a major affordability hurdle for the housing market.