‘It hasn’t been normal’: As mortgage rates rise for a fifth week, it’s time for homebuyers to abandon their old assumptions

U.S. mortgage rates surged by over a quarter-point this week, as policymakers continue to battle high inflation by slowing the economy.

The rate on the popular 30-year fixed mortgage is at a nearly 14-year high, according to a widely followed survey.

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That means a buyer financing a median-priced home with a 30-year fixed-rate loan is now looking at a monthly payment about $900 per month higher than this time last year, says George Ratiu, senior economist with Realtor.com.

That amounts to an annual increase of over $10,000.

Yet while higher borrowing costs are keeping people on the sidelines, would-be buyers may not be able to count on rates coming back down. Mortgage rates are still below their long-term averages.

30-year fixed-rate mortgages

The average rate on a 30-year fixed mortgage rose to 6.29% this week, up from 6.02% the previous week, mortgage finance giant Freddie Mac reported on Thursday.

A year ago at this time, the 30-year rate was averaging 2.88%.

Rates have risen for five straight weeks, and the housing market is feeling the strain.

Home sales are in free fall and prices in August were down 6% from their June peak, according to a report from Realtor.com.

“While sales prices were still higher than a year ago, the growth moderated into single-digits, a clear sign that the exponential growth of the past several years has slowed,” Ratiu says.

15-year fixed-rate mortgages

The average interest rate on a 15-year fixed mortgage is running 5.44%, up from 5.21% last week, Freddie Mac says.

Last year at this time, the 15-year rate averaged 2.15%.

Interest rates on 15- and 30-year mortgages typically mirror the yield on the 10-year Treasury, which jumped this week to its highest level since 2011, said Sam Khater, Freddie Mac’s chief economist.

Borrowing costs could continue to rise as the Federal Reserve plans more rate increases. The central bank hiked its benchmark interest rate three-quarters of a point this week and said more increases were likely as it attempts to bring down the hottest inflation in decades.

“For housing markets, higher borrowing costs are the very remedy the Fed is prescribing in order to cool demand and lower overheated prices,” Ratiu says.

5-year adjustable-rate mortgage

The average rate on a five-year adjustable-rate mortgage, or ARM, is averaging 4.97%, up from 4.93% last week.

The five-year ARM rate was averaging 2.43% last year at this time.

Adjustable mortgages start out with lower rates than longer-term loans —though after their initial terms, they adjust each year in line with the prime rate or another benchmark.

ARM borrowers often refinance into fixed-rate loans after the initial five years, but that can be a risky strategy since no one truly knows where long-term rates are headed.

Are rates really that high?

While Americans have long benefited from cheap borrowing costs, ultra-low mortgage rates are not the historical norm.

The average long-term rate on a 30-year loan is 7.76%, says Michele Raneri, vice president of financial services research and consulting for TransUnion, a consumer credit reporting agency.

“People feel like the rate we’ve experienced in the last couple of years has been normal,” Raneri says. “It hasn’t been normal.”

Mortgage applications this week

For the first time in six weeks, mortgage applications increased last week, according to the latest survey from the Mortgage Bankers Association (MBA).

Applications were up 3.8% from the previous week, led by an uptick in refinance activity. Refi applications were up 10% over the previous week — but they remain 83% lower than last year at this time.

Purchase applications were up 1% last week, but were down 30% from one year ago.

“The weekly gain in applications, despite higher rates, underscores the overall volatility right now as well as Labor Day-adjusted results the prior week,” says Joel Kan, the MBA’s associate vice president of economic and industry forecasting.