Mortgage interest rates have just about doubled in the past year, and this has made home purchases and refinances difficult for many borrowers.
If you’ve been waiting for the right opportunity to purchase a home, 2023 may be your year.
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Experts are predicting that interest rates may drop a bit this year, or at least, they won’t increase as significantly as in the past year.
Let’s take a look at what has happened to rates in the past few years, the factors that influence interest rates and where some forecasters believe rates will land by the end of the year.
What has happened to mortgage rates in the past few years?
Mortgage interest rates in the past few years have been heavily influenced by the effects of the COVID-19 pandemic.
In 2019, the average 30-year fixed rate was 3.94%, according to Freddie Mac.
During the height of the pandemic, rates fell in response to the economic uncertainty and actions by the Federal Reserve. Current homeowners and first-time buyers alike rushed to refinance their current mortgages or purchase a new home to take advantage of the current rates.
By the end of 2021, rates had dropped below 3%.
But throughout 2022, rates began to steadily increase in response to a strengthening post-pandemic economy and rising inflation.
Home prices skyrocketed throughout 2021 due to scorching consumer demand, and in 2022 the Federal Reserve took strong action to curb inflation through several interest rate hikes.
The window of opportunity for buyers and those looking to refinance became increasingly smaller; and by October 2022, rates surpassed 7% for the first time in 20 years.
While a doubled interest rate might not seem too significant, it means homeowners are paying thousands more per year on their mortgages than they would have otherwise. As a result, higher interest rates coupled with high home prices created a difficult environment for buyer hopefuls.
Let’s take a look at all the factors that influence interest rates—including the ones you have control over as a borrower.
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What factors influence mortgage rates?
Several factors influence the direction of interest rates. Having a basic understanding of these factors is helpful, but it’s also important to remember that sometimes rate ups and downs surprise even the experts.
Overall, it’s more helpful to focus on your personal financial situation and what you can afford, rather than what rates are doing.
The economy is one of the biggest interest rate influencers.
If the economy is strong, rates are generally higher, while a recession will usually result in lower rates.
Unemployment rates can be a good indicator of economic health.
Inflation has been a hot topic in the past year because this is the strongest driving force in today’s higher rates.
As inflation increases, mortgage interest rates usually will increase. And as inflation eases, mortgage rates generally ease too.
The Federal Reserve
The Federal Reserve does not directly influence mortgage rates, but it does often have an indirect effect on them.
The purpose of the Fed’s rate hikes over the last couple of years is to curb inflation; so as they continue to raise interest rates, mortgage rates are also affected by theseincreases.
10-year Treasury rates
Mortgage interest rates are more closely tied to 10-year Treasury rates (briefly stated, what the federal government pays to borrow money) because as Treasury bond prices decrease, mortgage interest rates generally increase.
Last but not least, the following factors can directly influence your personal mortgage interest rate:
- Your credit score
- Your income and employment
- Your debt-to-income ratio (DTI)
- What you intend to pay as a down payment
- The type of property you intend to purchase
- The terms of the loan you obtain
- The amount you need to borrow
The first step to buying a home is pre-approval with a reputable mortgage loan officer. This process allows borrowers to understand their loan options and what they can afford. If you’re not happy with the results of your initial application, you can always spend a few extra months working on your credit and paying down debt, then reapplying.
Even better than standard pre-approval, Compass Mortgage offers our borrowers Get Committed®, a unique program that provides a fully underwritten loan commitment that locks in your interest rate before you even find the property you want to buy.
Get Committed® offers a more competitive edge over all other buyers who only have pre-approval letters. An official loan commitment will show the seller that your offer is financially secure and that you’re ready to buy.
Read on to see what the experts are predicting for rates in 2023.
Expert predictions for mortgage rates in 2023
The “right time to buy” varies based primarily on a borrower’s unique personal and financial situation, but it doesn’t hurt to get an idea of where rates may be headed.
Let’s take a look at where experts expect 30-year fixed interest rates to land in 2023:
- Freddie Mac predicts that rates will average 6.4%, and end the year around 6.2%
- Fannie Mae forecasts an annual average of 6.3%
- Mortgage Bankers Association expects the average to be 5.2%
- Realtor.com says rates will average 7.4%
- National Association of Realtors believe rates will drop to 5.7% by the end of the year
Unless there are unforeseen circumstances, the predictions reveal that it is unlikely rates will double again. Instead, rates may either remain about the same or decrease slightly by the end of the year as inflation improves.
The best approach to buying a home or refinancing this year is to work closely with a loan officer and real estate agent whom you trust. These professionals can offer you expertise regarding a given locality that you cannot get from national news sources.
Home prices vary significantly by region. Local experts can help you determine your loan options based on your unique borrower situation and location.
How do borrowers determine the right time to buy based on current rates?
Homeownership became unaffordable for many in 2022 due to mortgage rates nearly doubling, but the outlook for 2023 is more positive.
Based on your location, your finances and your personal goals, 2023 may be the perfect year to purchase a home, refinance or tap into the equity in your home with a home equity loan or home equity line of credit.
If you’re ready to take the next steps in your journey to homeownership, connect with the experts at Compass Mortgage today.
With Compass Mortgage’s distinctive Get Committed® program, you can go through most of the steps in the loan process to ensure a loan commitment before you even make an offer on a home.
Remember, standard pre-approval does not mean you have secured a loan. Get Committed® locks in that perfect interest rate you found and allows you to move forward in confidence.
Apply today to discuss your loan options.