2 Reasons You Might Get Stuck With an Even Higher Mortgage Rate This Year
- Your goal in signing a mortgage should be to snag the lowest interest rate possible.
- You may end up getting hit with a higher rate due to credit score damage or other factors outside your control.
You may need to gear up to pay more to borrow for a home.
Home prices have been elevated for well over a year due to limited inventory and high buyer demand. Many would-be buyers are banking on relatively low mortgage rates to help offset their higher purchasing costs.
So far, mortgage rates have been higher in 2022 than they were in 2021. But here's why you might end up with an even higher rate this year.
1. The Fed's actions might spur rate increases
The Federal Reserve has made it clear that it intends to raise its interest rates. Now the Fed doesn't set mortgage rates, or any consumer interest rates. Rather, it establishes what rates banks charge each other for short-term borrowing purposes.
That said, the actions of the Fed can trickle down to consumer rates and drive them upward. That's not always a bad thing. If you have money in a savings account, you might see your interest rate rise later this year. But if you're looking for a mortgage, you may end up getting stuck with a higher rate.
2. Inflation might result in credit score damage
These days, many people are having a hard time keeping up with everyday expenses due to inflation. If that happens to you, it could result in you falling behind on some bills. And if you're late paying bills, you could cause pretty substantial damage to your credit score.
Meanwhile, the higher your credit score, the more favorable an interest rate a lender is likely to offer you on a mortgage. You may end up paying more to borrow if inflation causes a change in your financial behavior and a dip in your credit score.
Plus, an increase in everyday expenses could force you to carry more of a balance on your credit cards. That could also cause your score to drop.
Now to be fair, if you're really at a point where you can't keep up with everyday bills due to inflation, then it's probably not the right time to attempt to buy a home. But perhaps you have money set aside for a down payment you don't want to touch, so you're racking up debt on your credit cards to avoid having to dip into your down payment funds. Still, going that route could hurt your credit, so that's something you'll want to be mindful of.
How high will mortgage rates get this year?
It's hard to predict how high rates will climb in the course of the year. It's not unreasonable to think the average 30-year mortgage will hit 4.5% at some point in the near term, and maybe even creep toward 5% as the year goes on.
That may seem like a lot to pay for a mortgage based on the rates borrowers have enjoyed over the past couple of years. But it's also important to remember that historically speaking, an interest rate anywhere in the 4% range isn't bad for a 30-year loan.
That said, if you want to increase your chances of snagging the lowest interest rate possible on a mortgage, work on boosting your credit, or take steps to avoid damaging your score. You can't control what the Fed does and how its actions impact mortgage rates. But you can try to take steps to improve your personal financial picture so you're able to enjoy as low a mortgage rate as possible.
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