Will Mortgages Get More Expensive in 2023?

If you're thinking about buying a home, paying attention to trends in mortgage rates may be a good idea.

During the heart of the COVID-19 pandemic, mortgage rates plummeted and repeatedly hit new record lows. But things changed more recently. In 2022, rates reached 6% to 7% and are still hovering close to that level as of the beginning of October.

Would-be home buyers may be looking at today's mortgage rates and struggling to decide whether to wait or lock in now because of the possibility that borrowing costs will go up in 2023. But is that likely to happen?

Are mortgage rates going to increase next year?

Determining whether mortgage rates will go up next year isn't that easy, as there are some indicators that point to rising rates -- but things could easily go the other way, too.

The best reason to believe mortgage rates will continue rising is because the Federal Reserve has raised interest rates several times this year and is likely to do so again. The Federal Reserve is the U.S. Central Bank and it sets the overnight rate at which banks can borrow from each other. Since inflation is surging, the Federal Reserve has raised rates to make borrowing more expensive and to tighten the supply of money.

The Federal Reserve raising rates does not directly impact mortgage rates, but when banks have less access to cheap money, consumers are affected in the form of higher costs that are passed on to them. So, if inflation keeps surging, rates are likely to keep going up. If, on the other hand, demand for goods and services plummets because of a recession and prices fall, rates could remain the same or even decline.

Reduced demand among borrowers could also result in more competition among lenders, which could lead to a decline in rates from the current level. Worsening economic conditions, including a recession or increased unemployment, could lead to this outcome.

Should you buy a home now to avoid a potential mortgage rate increase in 2023?

If you are worried about rates going up in 2023, then you may wonder whether it makes sense to buy a home now or wait. And the answer is, it depends.

The key factors that determine whether you should buy a home actually have very little to do with prevailing mortgage rates. If you have a generous down payment, good credit, and can qualify for a loan you can easily afford, there is no reason not to move forward with your home purchase now.

Rates are higher than they've been in recent years but are low by historical standards. If they go up, you don't want to regret not locking in now. And if they don't go up but they fall instead, you can refinance to take advantage of the opportunity to save.

The fact is, as Warren Buffett once said, a 30-year mortgage gives homeowners the opportunity for a "one-way renegotiation" because the bank takes all the risk of rising rates while falling rates just present an opportunity for you to reduce borrowing costs. So, why not just buy now and start building equity rather than taking a chance of having to pay more in 2023?