Mortgage rates surge to levels not seen since the early days of the pandemic

Mortgage rates have come out soaring in just the second week of the year, reaching levels not seen since March of 2020, a closely watched survey shows.

Other new research shows the higher borrowing costs — which most experts say will only continue heading north as the economy improves — are prompting borrowers to lock in today's mortgage rates that are still low by historical standards.

30-year fixed mortgage rates

The average interest rate on a 30-year fixed-rate mortgage spiked to 3.45% last week, up from 3.22% the week earlier, mortgage giant Freddie Mac is reporting. Rates are the highest since the week of March 26, 2020, according to Freddie Mac's data.

One year ago, the 30-year rate was averaging 2.79%, just above the all-time low of 2.65%, which hit during the first week of January 2021.

But a lot has changed since then — namely inflation, and the Federal Reserve’s plans for combating it.

The government reported last week that inflation in 2021 shot up 7% — a 40-year high — amid a surge in demand for consumer products and an ongoing supply chain backlog.

“Mortgage rates rose across all mortgage loan types, with the 30-year fixed-rate mortgage increasing by almost a quarter of a percent" from the previous week's average of 3.22%, says Sam Khater, Freddie Mac’s chief economist.

“This was driven by the prospect of a faster than expected tightening of monetary policy in response to continued inflation exacerbated by uncertainty in labor and supply chains," Khater says.

15-year fixed-rate mortgages

The rate on a 15-year fixed-rate mortgage averaged 2.62% last week, up from 2.43% a week earlier, Freddie Mac says.

One year ago, the shorter-term loans were averaging 2.23%.

Note that the Freddie Mac numbers are simply averages, meaning higher — and even lower — rates are out there. Some lenders are still advertising 15-year refi loans at 2% and 30-year refis for under 3%.

If you’re a homeowner willing to take on a higher monthly payment, you could slash your lifetime interest charges by trading in a 30-year mortgage for a 15-year.

5-year adjustable-rate mortgages

The rate on a five-year adjustable-rate mortgage (ARM) averaged 2.57% last week, up from 2.41% the previous week.

Last year at this time, five-year ARMs were averaging 3.12%.

ARMs typically start out with lower rates than fixed-rate loans. But after a period of time, an ARM starts to adjust — that is, the rate moves up or down in sync with the prime rate or another benchmark.

If you financed your home with a popular 5/1 ARM — which offers a steady rate for five years before the adjustments start — you might want to consider refinancing into a more stable fixed-rate mortgage now that borrowing costs are pushing higher.

More from MoneyWise

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How borrowers are responding to rising rates

Homebuyers seem to have gotten the message that rates aren’t likely to fall back down. Applications for homebuyer "purchase" loans are up, according to the latest report from the Mortgage Bankers Association.

“Buyers are pouring into the market to claim a home before mortgage rates rise further as new listings slow to a trickle,” says Daryl Fairweather, chief economist at the real estate brokerage Redfin.

At today’s 30-year mortgage rates, buyers of a median-priced home already are paying some $219 more per month than they were a year ago, says George Ratiu, manager of economic research for Realtor.com. That’s over $2,600 annually.

“Real estate markets are unseasonably active this January, as many buyers respond to the signals of rising rates and prices by seeking to find the right home and lock in a fixed-rate mortgage payment,” Ratiu says.

Meanwhile, refinance loan applications from homeowners are at their lowest point since January 2020.

“Rates at these levels are quickly closing the door on refinance opportunities for many borrowers,” says Joel Kan, the lead economic and industry forecaster for the Mortgage Bankers Association.

What’s driving the higher rates?

With inflation at levels not seen in decades, the Federal Reserve has been on the hot seat to temper some of the demand that’s led to higher prices on cars, appliances and other consumer goods.

To help put a lid on runaway costs, the central bank recently indicated it would raise interest rates several times this year and stop its pandemic buying of bonds and mortgage-backed securities.

“If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will,” Fed Chair Jerome Powell said last week at his second-term nomination hearing in front of the Senate Banking Committee.

Even with the explosion in COVID-19 cases from the fast-spreading omicron variant, the economy’s future continues to look good.

“The mild impact of the omicron wave, despite the high number of cases, points toward a brighter post-pandemic horizon, a sentiment which underpins a more bullish outlook on the economy,” Ratiu says.

How to secure a favorable mortgage rate

If you took out your mortgage when rates were higher than they are today, or if want to refinance from a 30-year to 15-year home loan, you’ll want to ensure you’re doing all you can to get the lowest rate.

That means comparing offers from at least five lenders, which can maximize your savings on a refi, according to research from Freddie Mac and others.

Lenders like to see strong credit histories. If you haven’t looked at your score in a while, it’s easy today to review your credit score for free.

If your credit could use some work — perhaps you’ve accumulated a bunch of new debt during the pandemic — you might consider rolling credit balances into a lower-interest debt consolidation loan. By doing so, you can reduce your interest costs and potentially eliminate the debt faster.

And if you’re not a candidate for a refi, there are other ways to lower your homeownership costs. When it comes time to buy or renew homeowners insurance, flex your comparison shopping muscles again. You might just find a lower rate on your coverage.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.