As homebuyers grapple with record prices this spring, mortgage rates have also crept up.
On a 30-year fixed loan, the average rate was 7.39% as of May 1, according to Bankrate’s survey of large lenders, marking three straight months of 7% rates.
Blame inflation. It’s still stubbornly elevated, rising to 3.5% in March, and that’s led to dialed-back expectations about how quickly the Federal Reserve cuts rates this year, if at all. The central bank left rates unchanged at its latest meeting concluding May 1.
Meanwhile, the unemployment rate was 3.98% in March, while economic growth slowed to 1.6% in the first quarter of 2024.
All of these factors have added up to an uncertain timeline for the Fed, prompting investors to bid up 10-year Treasury yields, the informal benchmark for 30-year fixed mortgage rates.
As May ushers in peak real estate season, forecasters aren’t anticipating a break from the current spate of 7% mortgages.
Rates last hit 8% in October 2023. At that rate and the current median home price of $393,500, a borrower putting 3% down would pay about $250 more a month compared to a 7% loan.
While the Fed doesn’t establish 30-year mortgage prices, its moves can have immediate ripple effects, says Robert Frick, corporate economist at Navy Federal Credit Union.
The Fed delay has upended 2024 forecasts that once called for rates below 6%.
Current rate trends
The average rate on a 30-year mortgage was 7.39% as of May 1, according to Bankrate’s survey. While that’s a welcome drop from 8.01% on Oct. 25 of last year, it’s still higher than the sub-7% rates seen in January.
When will rates drop?
Overall, forecasters predict mortgage rates to continue easing, but not as much as previously thought.
While some lenders had expected mortgage rates to fall to 5.75% by late 2024, the new economic reality means they’re likely to hover in the range of 6.25% to 6.4% by the end of the year.
Mortgage giant Fannie Mae likewise raised its outlook, now expecting 30-year mortgage rates to be at 6.4% by the end of 2024, compared to an earlier forecast of 5.8%.
“A lot of us forecasted we’d be down to 6% at the end of 2023,” says Lisa Sturtevant, chief economist at Bright MLS, a large listing service in the Mid-Atlantic region. “Surprise, surprise, we [weren’t].”
One variable has been the unusually large gap between mortgage rates and 10-year Treasury yields. Normally, that spread is about 1.8%age points, or 180 basis points. This year, the gap has been more like 280 basis points, pushing mortgage rates a full percentage point higher than the 10-year benchmark indicates.
“There is room for that gap to narrow,” says Sturtevant, “but I’m not sure we’ll get back to those old levels. In this post-pandemic economy, the old rules don’t seem to apply in the same ways. We’re sort of figuring out what the reset is. Investors have a different outlook on risk now than they did before the pandemic. We’re just in this weird transition economy.”
Getting a mortgage now?
Mortgage rates are at generational highs, but the basic advice for getting a loan applies no matter the economy or market:
n Improve your credit score. A lower credit score won’t prevent you from getting a loan, but it can make all the difference between getting the lowest possible rate and more costly borrowing terms. The best mortgage rates go to borrowers with the highest credit scores, usually at least 740. In general, the more confident the lender is in your ability to repay the loan on time, the lower the interest rate it’ll offer.
n Save up for a down payment. Putting more money down upfront can help you obtain a lower mortgage rate, and if you have 20%, you’ll avoid mortgage insurance, which adds costs to your loan. If you’re a first-time homebuyer and can’t cover a 20% down payment, there are loans, grants and programs that can help. The eligibility requirements vary by program, but are often based on factors like your income.
nUnderstand your debt-to-income ratio. Your debt-to-income (DTI) ratio compares your total monthly debt payments against your gross monthly income. Not sure how to figure out your DTI ratio? Bankrate has a calculator for that.
n Check out different mortgage loan types and terms. A 30-year fixed-rate mortgage is the most common option, but there are shorter terms. Adjustable-rate mortgages have also regained popularity recently.