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Here’s what you need to know about mortgage rates if you’re buying a home
Sometimes you have to take advantage of the uncertainty.
The 30-year fixed mortgage rate in the United States more than doubled in less than three years, but signs point to steady relief on the horizon.
Fixed-rate mortgages, typically for 15- or 30-year terms, are the most popular due to their stability. After hitting record lows in 2021, 15-year and 30-year mortgage costs soared as the Federal Reserve jacked up rates to battle inflation. The average 30-year fixed mortgage rate approached 8 percent last fall, but many expect the Fed to cut rates later this month. The August housing forecast by Fannie Mae, the nation’s leading provider of mortgage financing, projects that the average 30-year fixed mortgage rate will dip to 5.9 percent by the end of 2025. The average rates for 15- and 30-year loans were 6.2 percent and 5.27 percent, respectively, on Thursday, according to the Federal Reserve Bank of St. Louis.
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Experts warn that you shouldn’t sit on the sidelines waiting for mortgage rate declines. There are other options available to help buyers strike before home prices climb even higher, which they have done in Greater Boston. The median sales price of $925,000 for a single-family home broke the record for July.
“You can sit on the sidelines and wait, but I think you’re going to wind up paying a higher price,” said Ellen Steinfeld, senior executive vice president of consumer lending and payments at Berkshire Bank. “I would perhaps recommend that home buyers, knowing that rates probably are going to come down, take an adjustable-rate mortgage.”
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In general, mortgage rates are determined by a combination of factors, such as current economic conditions, the lender’s risk appetite and overhead costs, and borrowers’ credit profiles, according to the Federal Home Loan Mortgage Corp., also known as Freddie Mac. (Your income, credit history, and down payment also factor into what you get, according to Rocket Mortgage.)
The Federal Reserve identifies the key interest rate, but it doesn’t officially set mortgage rates. That said, the central bank’s monetary policy can affect mortgage pricing. Lower interest rates mean it is cheaper to borrow money, and bond markets typically have an inverse reaction to interest rate policy. The 10-year treasury yield, which lenders can use as a guide to price home loans, also factors into mortgage pricing.
Adjustable-rate mortgages usually entail a lower introductory rate and are often more attractive to buyers who plan to sell their home or refinance before that lower initial rate period lapses. Following the introductory rate, the adjustable-rate mortgage resets and can either rise or fall with market conditions.
The average rate for a 30-year mortgage declined to 6.46 percent in late August — the lowest level seen in 15 months, according to Freddie Mac data. Further, the average 15-year mortgage also declined last month to 5.62 percent — down from the 6.55 percent seen a year ago.
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But don’t take this as a signal rates are destined to dip below 3 percent like they did in the summer of 2020.
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“It’s really hard to time the market for mortgage rates,” said Daryl Fairweather, chief economist at Redfin, an online real estate marketplace. “There’s such limited inventory that it’s hard to find the exact right home at the exact right time when mortgage rates are the lowest, and it’s also impossible to know when the exact right time is to lock in a mortgage rate. They always bounce up and down.”
High mortgage rates have many sellers sitting on the sidelines suffering from “mortgage rate lock.” According to Zillow, 92 percent of Boston-area homeowners are reluctant to give up their home and lower mortgage rates for today’s higher costs and lack of inventory. Experts agree that a healthy housing market has at least five months of inventory for home buyers to shop. In July, Greater Boston had 1.2 months of inventory in the single-family market and 2.1 months in the condo market, according to the Greater Boston Association of Realtors.
So, is there a magic rate at which homeowners will shed the confines of mortgage rate lock?
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It’s a case-by-case basis, but there is a general rule of thumb for those looking to refinance their existing mortgages and stay in their current home.
“When you refinance, you have closing costs, and you would want to be able to recoup those closing costs by your mortgage payment savings,” Steinfeld said. “You typically see people start to look at refinancing if their interest rate is 1 percent below their current rate.”
But for a widespread refinance environment to get underway, mortgage rates would have to get into the 5 percent range, Steinfeld added.
If that’s still not an ideal rate for you, keep in mind: There’s no limit to the number of times you can refinance your mortgage.
Just always be sure to account for closing costs to make sure the savings pencil out.
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