Rising Mortgage Rates Hit Home

Elizabeth Laprade, CFA

Senior Research Analyst

Rising mortgage rates have seen the 30-year fixed-rate edge up to near 6% over the last month—a level we haven’t seen since 2008. What gives?

Interest-rate hikes play into higher mortgage rates, but only indirectly. There’s a bit of a domino effect: The 30-year fixed rate tends to track the 10-year Treasury yield—which, as we saw above, has been rising as bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. sell off and yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. rise. This, in turn, is partly in response to the Fed’s ongoing tightening policy as it battles high inflation.

Even with rents cooling off, higher mortgage rates could eventually spell trouble for renters, prospective homebuyers or even some existing homeowners.

High food and home heating costs were already causing a struggle, and now it’s also pricier to pay a variable rate mortgage. The typical monthly mortgage payment today is around $2,300—up about 65% from the $1,400 average payment of a year ago. Higher home prices have contributed to the jump, but rates play a material role as well. And opportunities for refinancing narrow as rates climb.

Prospective homebuyers can’t catch a break either from rising mortgage rates either. Even as home prices trend lower in some areas, the decline has not been enough to offset rising mortgage rates. And as people get priced out of buying homes, they’re forced to rent, handing more pricing power to landlords.

Homeowners with fixed-rate mortgages are in better shape, but they’re not entirely immune. If rising rates start putting real pressure on home prices, well, the value of your home might decrease.

The takeaway is that we will be living with this for a while longer. The Fed has signaled its commitment to taming inflation. Until that happens, consumers struggling to pay for shelter or planning to move will remain in wait-and-see mode.