Connect with a top agent to find your dream home

Get started

Mortgage Rates Are Going Up: But Why? We Break it Down Here

At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.

The U.S. housing market is undergoing a rebalancing. Visit HomeLight’s 2022 Housing Trends Hub for information on how to navigate a shifting market — whether you’re a seller, buyer, or homeowner.

Though mortgage interest rates have taken a recent dip amid recession concerns, it’s no secret that these numbers have been climbing since the historic lows we saw in 2020 and 2021.

Just as one example, rates dropped as low as 2.15% on a 15-year fixed-rate mortgage in August 2021, and at the time of this writing — one year later — we’re now looking at 4.91% for those same terms. But why are mortgage rates going up?

Unfortunately, there’s no quick and easy answer to this question. Many factors are at play when it comes to determining mortgage interest rates and there’s little that the everyday consumer can do to change them. According to experts, though, now is still a good time to buy (or sell!) a home if you’re in a position to do so.

With the help of Richie Helali from HomeLight Home Loans and Leanne Hester, a top real estate agent based in Newport News, Virginia, we’re taking a deep-dive into why mortgage rates are rising and what it all means for homebuyers and sellers.

What determines mortgage interest rates?

In short, the market is what drives interest rates. And “the market” means everything from stocks to inflation to consumer spending habits — so when the Covid-19 pandemic hit and brought everything to a screeching halt, well, the powers that be had to do something to get dollars moving around again.

“The government did what the government normally does when there’s a recession; they have to get people to spend money,” says Helali. “They have to encourage people to spend, whether that’s consumers, businesses, and so forth — they want people to invest. So as a result? They slash interest rates.”

And the top of this “they” is the Fed.

The Federal Reserve System

The Federal Reserve System defines itself as “the central bank of the United States”, with five functions that serve to “promote the effective operation of the U.S economy and, more generally, the public interest.”

Part of these functions is to moderate long-term interest rates — including those for mortgages. The Fed increases interest rates to help combat inflation, which USA Today reports is at a 40-year high. When borrowing money becomes more expensive, people tend to spend less.

If you’re thinking this all sounds very back-and-forth — so the Fed wanted us to spend money during the past two years but now we’re supposed to spend less? — you’re not wrong.

“Toward the end of last year and the beginning of this year, we started seeing rates go up quite a bit and extremely quickly. This was the result of inflation,” Helali explains. “Part of the pandemic supply chain issues comes from folks wanting to spend more money to get the same goods, and as a result, inflation comes in at a record high. When that happens, the government needs to find a way to manage.”

Thus, interest rates go up and the housing market slows.

“But it’s all for good reasons,” says Helali. “The ultimate goal is that we need to get that proper balance.”

Prime rates and the bond market

While the Fed is at the helm of why interest rates are going up, the prime rate and the bond market also play roles in how people spend their money.

As the term suggests, the prime rate is a rate that banks and other financial institutions offer to well-qualified customers. People with great credit can typically receive a lower interest rate, or this so-called prime rate. Banks adjust the prime rate based on what the Fed has set forth and what the market is otherwise doing — always trying to strike that balance to get consumers to spend enough money to avoid a recession, but not so much as to cause inflation.

Within the bond market, participants can exchange debt securities, usually in the form of bonds. These are investments, subject to fluctuation in value depending on what’s happening with the market. When fixed-rate bond prices are up, mortgage rates are down, and vice versa.

Inflation and the economy

As Helali explained, when spending stops, we enter a recession. When frantic spending occurs, with people willing to pay more than they usually would for goods and services, inflation can occur.

The real estate market has been hot, hot, hot — with sellers holding the literal keys as buyers have scrambled to find inventory and compete against multiple offers in the hopes of a successful purchase. As the market is cooling, things are starting to level out for buyers, and part of this is due to increasing interest rates slowing down the bidding frenzy.

Why are mortgage rates going up?

As we’ve just covered, inflation is at the core of why mortgage rates are going up right now. Whether they’ll continue to rise is anyone’s guess, but experts find it likely.

Dr. Lawrence Yun, chief economist for the National Association of Realtors® (NAR), says that mortgage rates could potentially top 7% this year.

While rates in the 6% and 7% range may sound high compared to the 2% to 4% rates we’ve had for the last couple of years, from a historical context, mortgage rates are still pretty affordable. Just take a look at this New York Times article from January 1986, when the possibility of 30-year rates dipping below 10% was an exciting possibility.

Asking the other agent how many offers they have, if there’s anything that might help with the offer — such as a particular closing date or a rent-back situation — I think you have to be a very creative agent right now.
  • Leanne Hester
    Leanne Hester Real Estate Agent
    Leanne Hester
    Leanne Hester Real Estate Agent at Liz Moore and Associates LLC
    • star
    • star
    • star
    • star
    • star
    Currently accepting new clients
    • Years of Experience 10
    • Transactions 228
    • Average Price Point $237k
    • Single Family Homes 210

What do rising mortgage rates mean for buyers?

“If you ask any real estate agent, they’ll tell you the same thing: It’s always a good time to buy or sell a house,” laughs Helali.

But he’s not speaking in jest — there will always be a need to buy and sell.

“Maybe you got a new job and you have to move, maybe you’re an empty nester and you need to downsize, or maybe it’s the other way around and you need a larger place. Regardless of the market conditions, there’s still going to be people who are looking to purchase,” he says.

Rather than getting hung up on rising or falling interest rates and wondering if it’s better to wait and see what happens, Helali encourages buyers to shift their perspective.

“For anyone buying a house today, what you’re really doing is guaranteeing your price,” Helali shares.

In other words, if you buy a house today for $300,000, you’re locking in that price. If you wait six or eight months (or a year or more), sure, interest rates may have gone down, but the value of that property will almost certainly have gone up.

Buy when you’re ready

From the agent perspective, Hester doesn’t recommend that buyers wait around on interest rates to drop.

“I don’t think that’s a good idea because I don’t see them coming down quickly,” she says, citing limited home inventory as a bigger challenge for buyers right now than anything else. “I always tell my buyers that you have to have a little bit of a thick skin right now. You have to be able to put in several offers, sometimes over your comfort zone.”

To that end, Hester reminds buyers not to get too caught up in the frenzy — mortgage rates aside. Regardless of your motivation to buy a home, don’t let yourself get caught in a bidding war that may push you too far over budget.

“It’s easy to have the mentality of, ‘Well, $1,000 more? I don’t want to lose over $1,000,’ and get caught up in that,” Hester explains.

Instead, Hester says that it’s best to work with an experienced agent who will ask the right questions and find creative ways to make your offer more enticing. “Asking the other agent how many offers they have, if there’s anything that might help with the offer — such as a particular closing date or a rent-back situation — I think you have to be a very creative agent right now.”

The bottom line? If you’re otherwise ready to buy now, in a way that makes sense for your lifestyle and your budget, go ahead and buy a house. Don’t let mortgage interest rates encourage or deter you. Remember, you can always refinance later if rates drop significantly enough to where it makes sense.

Find an Expert Buyer's Agent to Help You Navigate a Shifting Market

Looking to buy a home, but need some help navigating the market? Now is still a great time to buy, work with an expert real estate agent to help you find your dream home.

What do rising mortgage rates mean for sellers?

“We’re still going to have buyers, I don’t think that’s going to be a problem,” says Hester.

While she doesn’t think potential sellers should avoid putting their home on the market due to mortgage rates, she does encourage them to keep a level head.

“We’ve had such a frenzy that sellers are becoming a little less realistic. They want way more than what the market pulls — I’m fighting appraisals with almost every property. And you know, more power to them, of course we want them to get as much as they can, but I think as the market gets pinched down a little, sellers will have to understand that, ‘Hey, I might have to make a repair or two,’” Hester explains.

So, just as with buying a home, if you’re in a position to sell, go ahead and sell — don’t get hung up on what’s happening with interest rates.

Selling Your Home Made Easy

Sell when you’re ready without the hassle of paying for repairs, prepping for listing, or dealing with showings.

Remember, it’s all cyclical

For as long as mortgage interest rates have been around, they’ve risen and fallen. At the end of the day, people will always have a reason to buy and sell property, so make the decision based on your needs — not what’s happening with mortgage rates.

And besides, rates could always be worse.

“My dad bought a house in the late seventies,” says Helali. “His first interest rate was 18%.”

Header Image Source: (tokar / Shutterstock)