Mortgage RatesHow Will Rising Interest Rates Affect the Housing Market?

How Will Rising Interest Rates Affect the Housing Market?

Mortgage rates are rising across the board, and this week, 30-year fixed-rate mortgages rose above 3% for the first time since June. Experts are anticipating mortgage rates will continue to steadily increase for the rest of 2021.  

30-year mortgage rates hit 3.01% at the end of September, up from 2.88% just a week earlier. And 15-year mortgage rates rose to 2.28% from 2.15% a week earlier. These gains may signal that the U.S. is nearing the end of rock-bottom mortgage rates.

That means if you’ve been on the fence about refinancing or locking in current rates, the time to act is now. Let’s look at a few things you need to know about the trajectory of the housing market. 

Why are interest rates rising?

The U.S. has enjoyed incredibly low interest rates over the past year. For most of 2021, mortgage rates have remained below 3%. But as interest rates continued to fall, housing prices also rose dramatically. 

Demand for houses has spiked across the country, and home prices rose more than 43% from 2016 to 2021. But thanks to low interest rates, borrowers could continue to buy higher-priced homes without their monthly mortgage payments going up. But this trend may soon be coming to an end. 

The Federal Reserve has indicated that increasing mortgage rates could be the best way to combat high housing prices. The Fed has kept rates low throughout the pandemic, but it may begin to increase rates over the next year. 

The Fed doesn’t directly control mortgage rates but can influence these rates. For instance, if the Fed raises the federal fund rate, mortgage rates will likely increase as well. 

And if the Fed starts buying fewer mortgage-backed securities (MBS), the demand for homes could fall, and rates will likely increase.

What borrowers should do next

It does look like mortgage rates will start going up, but this change will take time. Let’s look at a few ways borrowers can prepare themselves for this change:

  • Refinance your home: If you’ve been on the fence about refinancing, now is the time to act. If the current rates are lower than the interest rate you have now, refinancing can help you save on your monthly mortgage payment. It can also help you save thousands of dollars in interest over the life of the loan. 
  • Reduce debt: One of the best ways borrowers can prepare for rising interest rates is by paying down debt. In particular, you should focus on paying down high-interest credit card debt. And now is an excellent time to start increasing your savings.
  • Lock in your current rates: And finally, if you have a variable interest rate on your home, you should consider switching to a fixed-rate loan. Although interest rates are going up, they are still much lower than they’ve been in years past. Locking in the current low rates will protect you from rising interest rates in the future.