Sorry, you need to enable JavaScript to visit this website.
Skip to main content

Thursday, December 07, 2023

Mortgage rates and the housing market

Mortgage rates and the housing market

homes someone could buy

Potential home buyers are continuing to see the highest mortgage rates in more than a decade. As of mid-April, a 30-year fixed-rate mortgage averaged 6.39%, according to Freddie Mac.1 Just a year ago, in April 2022, the average rate was 5.11% and two years ago in April 2021, it was more than half of what it is today (2.97%).

If rising mortgage rates have you feeling a bit overwhelmed, you’re not alone. According to recent Empower research 43% of Americans say they’re extremely or very concerned about the housing market.2

But despite being concerned, one third (29%) of Americans say financial freedom means owning a home.3 So when the time comes to make that big purchase, it’s important to understand the current mortgage rate environment, and how the process works.

Why have mortgage rates gone up?

To tamp down inflation, the Federal Reserve has been raising the short-term interest rate that banks pay when they borrow from each other. Higher interest rates are designed to cool down the economy and put the brakes on inflation. And although the Fed doesn’t set mortgage rates, when banks pay more to borrow money, they charge you more as well. Hence those mortgage numbers.

The increase can make a big difference. For example, a 30-year mortgage for $300,000 at a 2.97% rate would cost you around $123,000 in interest over the life of the loan. At today’s rate, you’d pay around $300,000 in interest for the same loan.4

Even fractions of one percent in your interest rate can add up over the years. So it pays to shop around for a mortgage—and to be aware of how lenders determine mortgage rates.

How do lenders determine mortgage rates?

Different home buyers qualify for different rates. Here’s an overview of the factors that affect your rate:

Your credit score
Home buyers with good credit scores generally qualify for better mortgage rates because they are considered less risky. The three credit bureaus use different algorithms to calculate your score, but they are similar. The most important factor is paying all your bills on time. A score of 700 or higher is optimal.

Your income and debt
Your income is a limiting factor in the size of your loan, but lenders also consider what’s called your debt-to-income ratio (DTI) when determining your rate. The ratio refers to your total monthly debt as a percentage of your family’s gross monthly income. Lenders typically prefer a DTI of no more than 36%, including the loan you are applying for (along with expenses like property tax and insurance). A higher DTI suggests you could be a riskier loan recipient, so you’ll pay more to borrow.

The size of your down payment
A down payment of at least 20% usually merits a better mortgage rate, since the bank knows you’ve got “skin in the game” and will be less likely to risk losing your home in foreclosure. Moreover, down payments of less than 20% often require you to buy private mortgage insurance (PMI), typically around 1% of the mortgage annually.

The loan type and term
Besides conventional mortgages, you might qualify for a loan underwritten by federal government agencies such as the FHA, USDA or VA. Sometimes they have better terms, depending on your situation. Some lenders also handle those loans and can help you figure it out.

Rates also differ between fixed and adjustable-rate mortgages (ARMs), but be careful: rates on an ARM usually start low, then increase after a few years—often by a lot.

Finally, the term of your loan will also affect your rate. The average cost of a 15-year fixed-rate mortgage was 5.76% as of April 24—more than half a point less than a 30-year mortgage5. However, the monthly payments will be much larger given the shorter payoff period.

Reviewing your loan estimate

Whatever type of loan you apply for, you’ll receive a written loan estimate from the lender that will detail your mortgage rate plus the fees, closing costs and so-called discount points, which are upfront interest charges tacked on at the beginning of your loan that reduce your monthly payment.

If you’re planning to stay in your house a long time, paying more in points—and less every month—can be a good deal. On the other hand, if you think you’ll be selling the house within a few years, it might be wiser to settle for fewer, or no points and a higher monthly payment.

When you review the loan estimate, focus on the annual percentage rate, or APR, which is the actual interest rate after factoring in all fees, points and closing costs. The APR allows you to compare loans that may have the same nominal interest rate but different upfront costs. Note that the APR on an adjustable-rate loan will generally not reflect the future interest rate, which is determined by market conditions.

Mortgage rates forecast

Wondering whether you should buy now or wait? No one can say for sure where rates or home prices are headed. But as the economy slows due to Fed policy, mortgage rates are likely to moderate. Some experts believe the rate on a 30-year fixed mortgage will hover around 5-6%, while others are predicting “rate volatility” throughout the year.6

If higher mortgage rates are getting you down, take heart: We’re not even close to record-breaking rates like the 18% seen back in 1981. Moreover, higher rates may cool down home prices, which might land you a better house for a smaller down payment.

Want to dive deeper?

Tom Nun, Empower portfolio strategist, shares his latest investing insights related to the housing market: Sticky situation: So far, home prices have defied predictions of a collapse. Why, and can it last?

1 Freddie Mac, April 2023.

2 Empower, What are people’s current economic fears survey, March 2023.

3 Empower, Money Talks survey, January 2023.

4, Mortgage Calculator, April 2023.

5 Freddie Mac, April 2023.

6 Forbes, "Mortgage Rate Forecast for 2023," April 2023.



The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Compensation for freelance contributions not to exceed $1,250. Third-party data is obtained from sources believed to be reliable; however, Empower cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third-party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Empower of the contents on such third-party websites. 

Certain sections of this blog may contain forward-looking statements that are based on our reasonable expectations, estimates, projections and assumptions. Past performance is not a guarantee of future return, nor is it indicative of future performance. Investing involves risk. The value of your investment will fluctuate and you may lose money. 

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements. 

Advisory services are provided for a fee by Empower Advisory Group, LLC (“EAG”). EAG is a registered investment adviser with the Securities and Exchange Commission (“SEC”) and subsidiary of Empower Annuity Insurance Company of America. Registration does not imply a certain level of skill or training.