Reasons why mortgage rates are going up

There are numerous factors that play into why mortgage rates are going up. Here is everything you need to know

Reasons why mortgage rates are going up

In April 2023, the average mortgage interest rate on a 30-year, fixed-rate mortgage increased by 5% according to Freddie Mac. It is the first time in more than 10 years that the mortgage rates of that loan type have been that high.

Experts are not forecasting a decrease until early 2024—and not a significant decrease, at that.

But why are mortgage rates going up? How did we get here? And what are the various factors that affect mortgage rates in the US? In this article, we will look at the reasons why mortgage rates are going up.

Why are mortgage rates going up?

There are numerous factors that cause mortgage rates to go up. Some of these factors are under your control. Here is a quick look at some of them:

  • You have a strong FICO credit score
  • You take out a shorter-term loan, like a 15-year fixed-rate mortgage
  • You make a larger down payment
  • Your monthly debts are low

Some factors that cause mortgage rates to go up are, however, out of your control—such as how the US economy is performing. Inflation is one of the significant factors that impact mortgage rates. Usually, inflation leads to higher mortgage rates since it decreases the value of the US dollar.

Inflation also decreases the demand that investors have for mortgage-backed bonds. When demand drops, the costs of mortgage-backed securities drops. This results in increased interest rates for all types of mortgages.

When inflation is higher, mortgage rates also tend to increase. This means that getting a mortgage can become more expensive as higher interest rates translate into higher monthly mortgage payments.

In the next section, let’s look at how inflation plays a factor on why mortgage rates are going up.

Why mortgage rates are going up: How inflation plays a factor

The mission of the Federal Reserve, the USA’s central bank, is to limit unemployment and inflation rates through monetary policy. While it does not directly set interest rates on mortgages, the Federal Reserve does control the federal funds rate.

These are the interest rates that lenders charge one another for overnight loans in order to meet reserve requirements. The interest rate on other loans—like those attached to home loans—typically follows the direction of the federal funds rate.

Since 2022, mortgage lenders tended to raise their rates when the Federal Reserve raised its rate. The Fed raised its federal funds rate by 0.25% in March 2022. It also said it would keep raising this rate in increments of between 0.25% and 0.5% until inflation drops.

7 reasons why mortgage rates are going up

When speaking about mortgage rates, most people will bring up inflation—especially in recent years. While this has become a more prevalent trend in recent years, there are numerous reasons why mortgage rates are going up, including:

  1. Economic crisis
  2. The Federal Reserve
  3. World events
  4. Bond prices
  5. Property type
  6. Personal factors
  7. Inflation

Let’s take a closer look at each to give you a better understanding of why mortgage rates are going up:

1. Economic crisis   

Mortgage rates typically drop at the beginning of a recession and then rise as the economy stabilizes. For instance, if you took out an adjustable-rate mortgage during a recession, the mortgage rate will likely rise when the economic downturn reaches its end. Indicators of economic growth—as well as economic crisis—often include gross domestic products (GDP) and employment numbers.

2. The Federal Reserve

As mentioned, by increasing or decreasing the target for the federal funds rate, the Federal Reserve impacts short-term interest rates. The Fed makes its decisions based on the US economy, essentially to balance economic growth while limiting inflation.

When the Federal Reserve chooses to tighten the money supply, it also raises interest rates on consumer borrowing—which includes mortgage rates. Then, when the Fed increases its target range for the federal funds rate, it ends up paying more to borrow funds from one another. The result is the lender passes the high costs onto the customers.

3. World events

Major world events can have a significant impact on why mortgage rates are going up. In recent years, COVID-19 and the Russian conflict in Ukraine have impacted mortgage rates globally.

Historically, mortgage rates were impacted by World War II, the oil embargo in the 1970s and 1980s, the 2007 housing market crash, and Brexit.

4. Bond prices

As bond prices go up, mortgage rates go down. And if bond prices go down, mortgage rates will increase. Ten-year Treasury rates also impact lenders’ interest rate, with mortgage rates rising or falling depending on demand.

Generally, when Americans are feeling spooked by the economy, they invest more in bonds. Because yields are considered safer assets, yields will go down. If Americans are feeling more positive, they will invest more money in stocks. While stocks tend to offer a higher rate of return, they also pose a greater risk of loss.

5. Property type

Lenders typically judge mortgage rates on your physical attachment to a property, not just on your financial investment. If a property is your primary residence, for instance, you are more likely to prioritize your monthly payments there, even if you get into trouble financially. Payments on your vacation or investment property may be less of a priority. In other words, some home loans come with a higher risk for lenders and, therefore, they charge a higher mortgage rate.

6. Personal factors

Lenders look at your finances and other personal factors to determine your mortgage rate. Some of these factors include how much you want to borrow, your repayment term, your loan-to-value ratio, your credit score, and your employment status and income.

7. Inflation

As mentioned, mortgage rates and inflation are connected, however indirectly. When inflation rises, mortgage rates rise to keep up with the value of the US dollar. When inflation drops, mortgage rates follow suit.

Another reason inflation is such a significant factor when it comes to mortgage rates is the cost of borrowing is more expensive as inflation rates increase. In that case, most people are likely to hold on to their money than spend it.

Working with a mortgage professional can help you understand the reasons why mortgage rates are going up.

Why mortgage rates are going up: will mortgage rates ever fall?

As uncertainty remains over further rate hikes by the Federal Reserve, organizations are forecasting declining average mortgage rates on 30-year fixed-rate mortgages into 2024.

“But it will depend on the Fed’s decisions about raising rates in the second half of (2023),” Mark Fleming, chief economist at First American Financial Corp, told CBS News. And even if they do go down, it won’t be back to the rates of yesteryear. Six per cent of mortgage rates used to be normal, and that’s more reasonable to expect too.”

Adam Sharif, founder and chief strategist of nxtCRE, agreed, says if mortgage rates do decrease, it will be at the beginning of 2024—and not by much.

Why mortgage rates are going up: closing thoughts

Current mortgage rates are influenced by multiple factors. Some are in your control; some depend on the wider US economy. While inflation is a major contributing factor to mortgage rates, world events and your personal finances also play a part.

To work with a loan officer to help you navigate mortgage rates, take the time to look at the mortgage professionals we highlight in our Best of Mortgage section. Here you will find the top performing mortgage professionals, including mortgage loan officers, across the USA.

Have knowledge of why mortgage rates are going up? Let us know in the comment section below.