If you were planning on buying or refinancing a house soon, you'd better start saving up. According to Freddie Mac, the average rate on 30-year mortgage loans just hit its highest point since March 2020 -- right before the pandemic reared its ugly (and, unfortunately still-present) head. 

It's a stark turnaround from just a few months ago when rates sat near historic lows. In November, mortgage rates were still below 3%. And last summer? They bottomed out at a mere 2.65%.

On a 30-year $250,000 mortgage, that's the difference between a $1,007 monthly payment and a $1,129 one (not to mention about $44,000 in long-term interest too).

It's also yet another drag on overall housing affordability. The median national home price closed out 2021 at an all-time high of $386,000, and incomes just can't keep up. In fact, according to the Federal Reserve of Atlanta, it took the average American 33% of their monthly income to afford a mortgage in October, marking the lowest level of housing affordability since 2009. 

This week's rate jump only exacerbates matters further.

Person using calculator.

Image source: Getty Images.

Why are rates rising?

Experts have been predicting rate jumps for some time now. In countless 2022 housing forecasts, economists projected rates would rise gradually over time, settling in somewhere between 3.3% and 4% by year's end. This week's sizable 23-basis-point surge has already surpassed some of those predictions.

But while the jump is shocking to many, it's not wholly a surprise -- at least if you've monitored recent financial headlines. Just days ago, we learned from the Bureau of Labor Statistics that inflation is now at its highest point in nearly 40 years. Historically, as inflation rises, rates tend to as well. 

The Federal Reserve's response to that rising inflation plays a prime role too. Last week, the Fed released minutes from its December meeting, which signaled a quickening of its previously announced quantitative easing measures.

The bank will now speed up its pullback on mortgage-backed securities, reducing its purchases to just $10 billion per month. These investments played a big role in the bargain-basement rates we saw in recent years, and according to the Fed, they'll ultimately cease by mid-March.

Also in those minutes was a sooner-than-expected hike in the federal funds rate. Previously, the Fed had said it wouldn't increase rates until 2023. Now, at least three increases are in the cards.

While the funds rate doesn't directly influence mortgage rates, any big policy change from the Fed can shake up the markets, sending investors toward safe havens like Treasury bonds. Typically, as yields on 10-year Treasury bonds rise, so do mortgage rates.

"Mortgage rates have increased in the past 10 days as the 10-year bond yield has surged in response to the Fed's pledge to fight inflation," says Melissa Cohn, regional vice president and executive mortgage banker at William Raveis Mortgage. "The yield hit a high of 1.80% this week -- a 30-basis-point increase from the end of 2021. That 30-basis-point hike pushed rates higher by about .25%."

Where will rates go from here?

Rates will be highly dependent on inflation as we continue on into 2022. If inflation rises and the Fed further tightens its monetary policy, rates might rise further. If inflation cools off, rates could remain relatively affordable.

Regardless of where rates move, though, Cohn says it's important to keep the big picture in mind.

"We have been in a nearly two-year period of historically low rates," Cohn says. "That honeymoon had to end as the economy recovers from the ravages of the pandemic. Yes, rates are higher, and yes, the move was fast and took many by surprise, but it was not totally unexpected with these crazy high inflation figures. The average rate of inflation for the decade before the pandemic was 1.50%; 7% is not sustainable for the health of our economy."

Buyers and investors might not look at those rate hikes as optimistically. Fortunately, Cohn projects rates will stay in the low-to-mid 3% range, at least for the next few months. So if a refinance or property purchase is on your agenda? You might want to pull the trigger soon -- before the Fed has time to change its tune.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.