Mortgage Rates Dropped for the First Time In Months. Have They Peaked? Experts Weigh In

Mortgage borrowers got a reprieve this week as the average 30-year fixed rate dropped for the first time in almost two months. Experts say it could be a sign of the market stabilizing after months of dramatic increases, but a lot of questions remain.

“I think that last week or this week might be close to the peak,” says Shashank Shekhar, founder and CEO of InstaMortgage. 

The average 30-year fixed rate was 5.22% this week, down six basis points from last week. That’s a small break amid a big surge, with the average up about two percentage points from where it was at the start of the year.

The unpredictability of mortgage rates, and the prospect that they’ll come down sooner or later, means you shouldn’t base your homebuying decision solely on the timing of the mortgage market, Shekhar says. “I don’t think a buying decision should be put on hold because the rates are going up, because we never know where the rates will be down the road,” he says.

The way mortgage rates work means your choice to buy a home can work out positively regardless of what happens to rates in the future, Shekhar says. “You get to ride both the waves,” he says. “If they go up, you’ll be happy that you locked a lower rate. If they go down, you’ll be happy because you’ll have the opportunity to refinance.”

What’s Behind the Higher Mortgage Rates?

That big jump since January is due to a few different factors. First is the highest inflation in 40 years, with the Bureau of Labor Statistics reporting prices were up 8.5% year-over-year in March. The Federal Reserve has taken steps to address that inflation, including raising its benchmark short-term interest rate, which has pushed mortgage rates up. Markets have also kept a close eye on the recovery from the COVID pandemic, including falling unemployment. Then there’s Russia’s war in Ukraine, which has had ripple effects across global financial markets.

“The volatility has been through the roof,” Shekhar says. “The market has been adjusting to a new news cycle practically every single day.”

Inflation may be turning the corner or at least stabilizing, and markets are starting to get comfortable with what the Fed will do, Shekhar says. “I’m hoping that if even three or four big factors out of five are stabilizing, then we will see a little more stable mortgage rates than the steep climb that we have seen so far,” he says.

What Other Mortgage Industry Data Show 

The average 30-year fixed rate was 5.10% in the latest survey by Freddie Mac, about the same as last week’s 5.11%.

Freddie Mac is a government-sponsored enterprise that buys mortgages on the secondary market, and while its survey’s methodology and the time in which it collects data differ from others, such as the Bankrate survey referenced in this article. While the mortgage rate averages vary, they show similar trends over time.

Historical Mortgage Rates: Today’s Rates Are Still Favorable 

Here’s a visual look at how current mortgage rates compare to the last 22 years.

Mortgage rates have quickly gone from being near all-time lows to the highest level in a decade or more, but it’s also important to keep a 5% rate in perspective. Compared to what rates were before the Great Recession, they’re still pretty good. Compared to other types of debt, such as credit cards, the rate for a mortgage is tiny. Finally, think about it in relation to the rate of inflation. With inflation above 8%, a 5% mortgage rate is incredibly favorable. 

Home Prices Are Rising Too

Homebuyers aren’t just contending with higher mortgage rates. The houses they’re trying to buy are also getting more expensive, and at a dramatic rate. The average price of a home was up 19.8% in February, according to the S&P CoreLogic Case-Shiller Index released this week.

Experts say the run-up in home prices during the past few years is driven by heightened demand and limited supply. Demand is up because more millennials are reaching prime homebuying ages, while the popularity of remote work has made buying a home more appealing. Supply is constrained because fewer new homes were built in the past decade, construction materials and labor are limited in the current economy, and fewer people are moving from their homes. “It’s just that there aren’t enough homes for everybody who wants one,” Daryl Fairweather, chief economist at Redfin, told us.

What Do Higher Mortgage Rates Mean for Consumers?  

Don’t base your decision to purchase a home based entirely on what’s happening with mortgage rates, Shekhar says. The choice is based more on an emotional need – more space for family, being closer to work, etc. – and you have to be able to afford it. “If those two factors meet, you can potentially buy in any market,” he says.

The higher rates have also spiked interest in adjustable-rate mortgages, or ARMs, Shekhar says. Unlike a fixed-rate mortgage, in which the interest rate and monthly payment are the same for the full duration of the loan, an ARM typically has a set rate for the first several years followed by a variable rate set by the lender regularly after that. That didn’t make much sense the past few years, with rates so low that an ARM could only lead to higher rates in the future. Now it might make more sense for consumers who want to take the risk, Shekhar says. With a 7/1 ARM, for example, you’d have seven years to refinance to a lower fixed rate before the lender starts changing the payment annually. “Given the cyclical nature of mortgage rates, even if you get one opportunity in the next seven years to refinance, that’s totally fine,” Shekhar says.

With interest rates higher than they’ve been in a decade, there are fewer people who can save money by refinancing to a lower rate, but there are some people who still have high rates, Shekhar says. “The opportunity to refinance that I see right now is for people who have high-interest debts, maybe credit cards, that they want to consolidate.”

Should You Consider a No-Cost Loan?

Homebuyers and existing homeowners also have an option that is not as well-known but could help save costs in the long run. With a no-cost loan, you take on a higher interest rate to avoid paying closing costs. That means you pay less up front but, theoretically, would pay more in the long run to make up for it. That type of loan might save you money if rates drop in the future, says Gordon Miller, president of North Carolina-based mortgage broker Miller Lending Group. “Rates should be near a peak but don’t pay closing costs as rates will be lower within the next 12 months,” he says.

The trick to getting savings from no-cost loans is to refinance when rates drop in the future, securing the advantages of both avoiding upfront costs and getting a low rate for the long-term. To do that, be sure you know when the “breakeven point” is on the loan – the point where the extra interest you’re paying exceeds what you would’ve spent on upfront costs, Shekhar says. “My bottom line is you should understand from your loan officer what your breakeven point is, and do you foresee that the mortgage rates will be available in that time period for you to refinance,” he says. “If you can do that, then it makes sense.”

To find the best deal, experts agree, it’s best to shop and compare a few lender offers first before committing. You can compare lender offers here using this Home Loan Comparison Calculator. You can enter in the loan amount, rate, fees, and term for each offer and see a true side-by-side comparison.