How high will mortgage rates go?

Mortgage rates soared to their highest levels in 21 years last week — and they’re showing no signs of dropping anytime soon. The average for a 30-year fixed rate mortgage touched 7.37% on Thursday and stayed there through Friday, according to Mortgage News Daily.

And there’s no end in sight. Some economists predict that if the Federal Reserve hikes interest rates again this year, mortgage rates could top 8%, a level not seen since 2000. (Though that’s still not the highest mortgage rate in history: 30-year fixed rate mortgages peaked above 18% in 1981, according to Freddie Mac.)

Minutes from the Fed’s July meeting showed a division among officials over whether another rate hike will be necessary at the September meeting. The Fed has raised the benchmark borrowing rate 11 times in the past 18 months, bringing it to 5.25%-5.50%, its highest level since 2001.

However, other factors could make an 8% mortgage rate scenario unlikely: For one thing, inflation finally seems to be cooling. Job growth slowed in July, and prices on consumer goods rose just 3.2% in July, year over year. The more inflation eases, the more likely it is that mortgage rates will begin to fall.

Mortgage rates closely track the 10-year Treasury yield, which goes up with the federal funds rate. As a result, rates on 30-year fixed-rate mortgages have more than doubled over the past couple of years as the Fed raised the benchmark borrowing rate by a whopping 5.25 basis points. (Unsurprisingly, homeowners who scored one of those ultra-low rates are staying put — more on that later.)

Some economists, however, have noticed a concerning trend recently in the spread between the 30-year mortgage rate and the 10-year Treasury yield. Right now there’s a spread of 300 basis points between the two — which Cris deRitis, deputy chief economist at Moody’s Analytics, told MarketWatch is “elevated and highly unusual.” High spreads tend to precede or accompany crises, such as the Great Recession.  

As recently as last week, many economists predicted the U.S. could avoid a recession as it beats back inflation, instead achieving the legendary soft landing. There’s enough positive economic data to support predictions that a soft landing could still happen. But analysts will be closely monitoring that spread in the meantime.

Housing inventory continues to be at record lows and is unlikely to increase meaningfully anytime soon, according to Redfin. For the most current look at the market, all eyes will be on the National Association of Realtors when it releases its July home sales data on August 22. In June, existing home sales were down 3.3% over the previous year, with the median sale price down 0.9%.

In response to the mortgage rate spike, mortgage applications were down 0.8% from the previous week, according to the Mortgage Bankers Association. “Overall applications decreased because of these higher rates, as both purchase and refinance applications ended the week at their lowest levels since February 2023,” said Joel Kan, MBA’s vice president and deputy chief economist. 

Ready to move on anyway? Many real estate pros are dredging up the old adage, “marry the house, date the rate.” Translation: If you see your dream home now, you don’t necessarily have to pass it by while waiting for a better mortgage rate in the future. Consider taking out a mortgage knowing that you’ll refinance once rates drop. 

Just a three-quarter point drop is enough to make refinancing worth it. And, as you look for the best possible rate right now, make sure you compare offers among multiple lenders. Just getting quotes from four lenders can save you up to $1,200 every year on your mortgage, according to a study by Freddie Mac. 

On average, the interest rate for a 30-year mortgage on August 18 was 7.37%, up from 7.19% on August 11. 

On average, the interest rate for a 15-year mortgage on August 18 was 6.76%, up from 6.60% on August 11. 

On average, the interest rate for a 30-year fixed rate jumbo mortgage on August 18 was 7.31%, up from 7.20% on August 11. 

On average, the interest rate for a 5/1 ARM on August 18 was 7.18%, up from 7.05% on August 11.

Mortgage rates are influenced by a variety of factors, including:

• Your credit score
• Down payment
• Your debt-to-income ratio (DTI)
• The type of loan you’re getting
• Loan term
• Interest rate type (fixed vs. adjustable)
• Inflation and the overall economy
• The Federal Reserve (which doesn’t set mortgage rates, but it certainly influences them)

If you’re currently shopping for a mortgage or considering refinancing, you’ve probably wondered why the quoted interest rate isn’t the same as the APR. That’s because the loan’s interest rate is what you pay the lender to borrow the money, while the APR (annual percentage rate) encompasses both the interest rate and all loan-related fees. Loan-related fees can include:

• Mortgage broker fees
• Loan origination fees
• Mortgage insurance premiums
• Some closing costs

The APR, therefore, is a truer measure of what it will actually cost you to borrow money to buy a home.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as the Home and Financial Services Editor for the Hearst E-Commerce team. Email her at [email protected].