Your mortgage could skyrocket if the federal funds rate goes from 2.25% to 4%

As of today, August 26, the average mortgage rate for a 30-year fixed is 5.5%, up 0.42% from last week, according to Freddie Mac’s Primary Mortgage Market Survey. This compares with just 3.079% a year ago. The average mortgage rate for a 15-year fixed is 4.85%, and for a 5/1 ARM, it is 4.36.

Amidst high inflation and slowing economic growth hurting consumer confidence and an accompanying slowdown in the housing market, mortgage rates remain strong in this environment. That’s because the Fed raised its key interest rate by 0.75% in June to a range of 2.25% to 2.5%, the biggest rate hike since 1994. Experts expect rates to rise this year as a result of inflation and the Federal Reserve’s decision to wind down policies that kept rates low at the start of the COVID-19 pandemic. The next possible rate hike could come at the September 20-21 meeting, perhaps 50 or 75 basis points.

The Fed may eventually raise the federal funds rate to 4% to combat inflation. This will likely send mortgage rates skyrocketing.

If you’re looking to buy a home in a down economy, a financial advisor could help you put together a financial plan for your needs and goals.

What today’s rates mean for your monthly payment

Use SmartAsset’s free mortgage calculator to determine how today’s mortgage rates will affect your monthly payments.

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  • Check out SmartAsset’s home buying guide

  • Compare mortgage rates

    What is the mortgage interest rate?

    The mortgage rate is the interest rate that the lender will charge on your mortgage, based on your risk profile and particular market conditions. Fixed mortgage rates stay the same for the life of your loan. Adjustable mortgage rates fluctuate at regular intervals after first remaining secure for a set period of time. Home loan interest rates affect how much interest the borrower will pay on a monthly basis and over the life of the loan.

    How are mortgage interest rates determined?

    Mortgage rates are affected by certain economic factors, including the prime rate, the lowest rate at which banks make loans. The prime rate usually tracks trends set by the Federal Reserve’s federal funds rate.

    Additionally, because many borrowers pay off their mortgages or refinance after 10 years, even with 30-year loans, the 10-year Treasury yield is a good barometer for mortgage rates. As bond yields rise, mortgage rates typically rise. As bond yields decline, they tend to fall.

    How to shop for mortgage rates

    • Consider both local and national lenders to make sure you uncover the best interest rates.

    • Don’t apply for multiple mortgages at once, or your credit score will be penalized. Instead, pull your credit report and share it with potential lenders. They should, in turn, provide you with prices to consider.

    • Use SmartAsset’s rate table to examine which lenders offer the best rates for your credit profile.

    What is a good mortgage rate?

    Several factors determine a mortgage rate, so a good mortgage rate really depends on the individual buyer. Although lenders will inevitably pass on the best available rates, the size of your down payment, credit history, income and outstanding debt will affect the best available rate.

    That said, a good mortgage rate for someone with a low credit score may be higher than one for someone with an impressively high credit score.

    How can I qualify for better mortgage rates?

    Scoring a more favorable mortgage rate can save you tens of thousands of dollars — or more — over the life of the loan. That’s why it’s important to do everything you can to improve your chances of getting better terms on your mortgage. Here are some quick tips on how to achieve a lower rate:

    • Boost your credit score. Your credit score is a major factor in determining the interest rate you will receive on your mortgage. With a higher score, you’ll likely be able to secure a lower mortgage rate. Make sure you make on-time payments, pay off debts and dispute errors on your credit report.

    • Increase your down payment. When you put more down in a home, you essentially reduce the risk the lender takes on your mortgage. As a result, you’ll increase your chance of securing favorable terms if you put 20% down instead of 10%.

    • Reduce your debt-to-income ratio. To determine your debt-to-income ratio, lenders divide your monthly obligations by your gross income. Reducing your debt and increasing the amount of money you earn will improve your DTI and qualify you as a less risky borrower. As a result, you will be able to secure a lower mortgage rate.

    How big a mortgage can I afford?

    Preventing yourself from biting off more than you can chew is important when it comes to taking out a mortgage. A rule of thumb for determining how much of a mortgage you can afford is to buy a home for no more than two to two and a half times your annual salary before taxes. So if you make $200,000 a year, you should be shopping around for homes that cost between $400,000 and $500,000. Be sure to use SmartAsset’s How Much House Can I Afford? calculator.

  • Tips for buying a home

    • Whether you are shopping in a seller’s market or a buyer’s market, a financial advisor could help you create a financial plan for your home buying needs. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide who is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

    • When competing in a seller’s market, home buyers may want to gain an advantage by securing a mortgage pre-approval.

    • If you’re buying a home when mortgage rates are rising, you may want to buy mortgage points in advance to lower your loan rate.

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