The Federal Reserve ended its long streak of interest rate hikes last week, but the pause may offer little reprieve to Americans squeezed by higher borrowing costs.
The decision left interest rates unchanged at a range of 5% to 5.25%, the highest level since 2001. However, policymakers also opened the door to additional rate increases this year, meaning there could be more pain for would-be homebuyers in the form of steeper mortgage rates.
“Higher rates are a positive for savers, but it also means mortgage rates may not fall all the way back to where they were in 2020 and 2021,” said Sonu Varghese, global macro strategist at Carson Group.
Mortgage rates spiked over the past year as the Fed waged an aggressive campaign to crush high inflation. In the span of just 16 months, the central bank approved 11 rate increases – the fastest pace of tightening since the 1980s.
MORTGAGE CALCULATOR: SEE HOW MUCH HIGHER RATES COULD COST YOU
While the federal funds rate is not what consumers pay directly, it affects borrowing costs for home equity lines of credit, auto loans and credit cards.
Rates on the popular 30-year fixed mortgage are currently hovering around 7.19%, according to Freddie Mac, well above the 6.29% rate recorded one year ago and the pre-pandemic average of 3.9%. It is near the highest level in two decades.
MORTGAGE DEMAND DROPS AGAIN AS INTEREST RATES EASE SLIGHTLY
Below, you can calculate how volatile increases and decreases in rates could affect the typical cost of a monthly mortgage.
Even just a minor change in rates can affect how much would-be homebuyers pay each month.
A recent study from LendingTree compared the average monthly payments on 30-year fixed-rate mortgages in April 2022 – when the rate hovered around 3.79% – and one year later, when rates jumped to 5.25%.
It found that higher rates cost borrowers hundreds more each month and potentially add as much as $75,000 over the lifetime of the 30-year loan.
The monthly mortgage payment for a median-priced home, calculated using the current 30-year mortgage rates and a 6% down payment, is about $2,590. That is dramatically higher than just three years ago, when that same mortgage payment would cost about $1,779.
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The spike in mortgage rates comes as the Federal Reserve wages an aggressive campaign to crush high inflation, raising interest rates at the fastest pace in decades in a bid to cool the economy and tame runaway prices.
While the federal funds rate is not what consumers pay directly, it affects borrowing costs, including everything such as home equity lines of credit, auto loans and credit cards.
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“Higher mortgage rates have radically altered homebuyer purchasing power and have been a key factor in existing home sales dropping from a more than 6.5 million unit pace in early 2022 to the roughly 4 million unit pace in recent months,” said Danielle Hale, chief economist at Realtor.com. “Perhaps more importantly, higher mortgage rates continue to keep existing homeowners sidelined because they don’t want to borrow at today’s much higher rates.”
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