Mortgage rates bounced higher again this week across all loan products, according to Freddie Mac. The average rate on a 30-year fixed mortgage surpassed 6%, a long-awaited benchmark that we’ve been marching toward for the past month. Borrowers are also having to shell out more money for discount points to lower their interest rates, resulting in higher upfront costs for mortgage applicants. Here are the current mortgage interest rates, as of Sept. 15:
- 30-year fixed: 6.02% with 0.8 point (up from 5.89% a week ago, up from 2.86% a year ago).
- 15-year fixed: 5.21% with 0.9 point (up from 5.16% a week ago, up from 2.12% a year ago).
- 5/1-year adjustable: 4.93% with 0.2 point (up from 4.64% a week ago, up from 2.51% a year ago).
“Mortgage rates continued to rise alongside hotter-than-expected inflation numbers this week, exceeding 6% for the first time since late 2008. Although the increase in rates will continue to dampen demand and put downward pressure on home prices, inventory remains inadequate. This indicates that while home price declines will likely continue, they should not be large.”
– Sam Khater, Freddie Mac’s chief economist, in a Sept. 15 statement
Average mortgage rates are now more than double what they were a year ago, resulting in much higher monthly payments and adding a hefty sum to the total interest paid over the life of the loan. Homebuyers can expect the monthly principal and interest mortgage payment to be hundreds of dollars higher today compared with this time last year for the same home price.
|Sept. 2021||Sept. 2022||Difference|
|Interest Rate||2.86%||6.02%||3.16 percentage points|
|Total Interest Paid||$167,038||$395,973||$228,935|
Estimated loan costs for a 30-year fixed-rate mortgage on a $425,000 home with 20% down.
In the current high-interest-rate environment, it’s more important than ever to shop around with multiple mortgage lenders to compare offers. Doing so may save you thousands of dollars over the life of the loan, as mentioned in last week’s column. But even after shopping around for a competitive mortgage rate, there’s still no chance borrowers will get the sub-3% rates seen last year.
To see how your estimated mortgage rate impacts your monthly payment and total interest charges, you can use a mortgage calculator.
Indicator of the Week: Payment-to-Income Ratio
Housing affordability is at its lowest point in 35 years, according to Black Knight, a mortgage technology and data provider. That’s based on the payment-to-income ratio, which is the percentage of a household’s income spent on a mortgage payment.
It currently takes more than 35% of the national median income to make a monthly principal and interest payment on a mortgage. During the same time just two years ago, the average P&I payment took up about 20% of a household’s income.
“Given the large role affordability challenges appear to be playing in shifting housing market dynamics, the recent pullback in home prices is likely to continue,” says Andy Walden, Black Knight’s vice president of enterprise research.
Still, it would take significant price cuts to even out the playing field for homebuyers today. If you were looking at a $400,000 home this time last year when mortgage rates averaged 2.86%, you’d have to reduce your purchase budget to about $280,000 to keep your monthly P&I payments about the same with today’s 6% rates. Even with listing prices beginning to moderate, it’s not likely that you’d find the same quality home at such a lower price point.
It’s understandable why some prospective buyers want to wait out the market until home prices moderate or mortgage rates come down. However, interest rates are likely to remain high as the Federal Reserve continues its fight against soaring inflation. Consumer prices rose 8.3% annually in August, which is a slight deceleration from the month prior but still well above the central bank’s 2% target.
Another option is to buy a home now and refinance in the future, but it’s difficult to say for certain when, or if, mortgage rates will fall to more favorable levels. Remember that mortgage refinancing comes with closing costs, so you’ll want to make sure the interest savings is worth the added fees. And another concern: If your home’s value drops by the time you wish to refinance, you may have to pay even more cash out of pocket to keep your loan-to-value ratio from rising too high.
In the meantime, this year’s homebuyers – including myself – are left with little choice but to wallow in self-pity, envious of every homeowner who was able to lock in a sub-3% mortgage rate last year. Personally, I take solace in the fact that if I stayed in my last apartment, I’d be dealing with annual rent hikes.