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Average 30-year fixed mortgage rates are currently the highest they’ve been in 20 years, according to Freddie Mac. Since January, rates have increased by over three percentage points, adding hundreds of dollars to the average monthly mortgage payment and pushing many first-time and low-income borrowers out of the market.
Last week, the National Association of Realtors released its annual profile of Home Buyers and Sellers, which found that high rates combined with still-elevated home prices have reshaped what the typical home shopper looks like.
The share of homebuyers who are buying for the first time dropped to an all-time low of just 26%, according to the report. A year ago, first-timers made up 34% of all homebuyers. First-time homebuyers are also older now than they’ve ever been, at a typical age of 36 years, up from 33 years last year.
“It’s not surprising that the share of first-time buyers shrank to the lowest level ever recorded given the housing market’s combination of historically low inventory, persistently high home prices and rapidly escalating interest rates,” Jessica Lautz, NAR vice president of demographics and behavioral insights, said in a press release.
First-time homebuyers who are struggling with affordability now may find some relief in 2023, as many experts expect rates to start trending down as inflation cools.
Today’s mortgage rates
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Today’s refinance rates
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Use our free mortgage calculator to see how today’s interest rates will affect your monthly payments:
Your estimated monthly payment
- Paying a 25% higher down payment would save you $8,916.08 on interest charges
- Lowering the interest rate by 1% would save you $51,562.03
- Paying an additional $500 Each month would reduce the loan length by 146 months
By clicking on “More details,” you’ll also see how much you’ll pay over the entire length of your mortgage, including how much goes toward the principal vs. interest.
Are HELOCs a good idea right now?
Many homeowners gained a lot of over that past couple of years as home prices increased at an equity rate. But because rates are so high now, tapping into that equity can be expensive.
For homeowners looking to leverage their home’s value to cover a big purchase — such as a home renovation — a home equity line of credit (HELOC) may still be a good option.
A HELOC is a line of credit that lets you borrow against the equity in your home. It works similarly to a credit card in that you borrow what you need rather than getting the full amount you’re borrowing in a lump sum.
Depending on your finances and the type of HELOC you get, you may be able to get a better rate with a HELOC than you would with a home equity loan or a cash-out refinance. Just keep in mind that HELOC rates are variable, so if rates start to trend up further, yours will likely increase, as well.
Mortgage rate projection for 2023
Mortgage rates started ticking up from historic lows in the second half of 2021 and have increased over three percentage points so far in 2022. They’ll likely remain near their current levels for the remainder of 2022.
But many forecasts expect rates to begin to fall next year. In their latest forecast, Fannie Mae researchers predicted that rates are currently peaking, and that 30-year fixed rates will trend down to 6.2% by the end of 2023.
The Mortgage Bankers Association also noted that a recession in the first half of 2023 could cause rates to fall even faster. It currently estimates that there’s a 50% likelihood that a mild recession will materialize in the next year.
Whether mortgage rates will drop in 2023 hinges on if the Federal Reserve can get inflation under control.
In the last 12 months, the Consumer Price Index rose by 8.2%. This is only a slight slowdown compared to the previous month’s numbers, which means the Fed will likely need to continue aggressively raising the federal funds rates to get prices to meaningfully come down.
As inflation slows, mortgage rates will likely start to fall as well. If the Fed acts too aggressively and engineers a recession, mortgage rates could fall further than what current forecasts expect. But rates probably won’t drop to the historic lows borrowers enjoyed throughout the past couple of years.
When will house prices come down?
Home prices are starting to decline, but we likely won’t see huge drops, even if there’s a recession.
The S&P Case-Shiller Home Price Index shows that prices are still up year-over-year, though they fell on a monthly basis in July. Fannie Mae researchers expect prices to decline 1.5% in 2023, while the MBA expects a 2.8% increase in 2023 and a 2.1% increase in 2024.
Sky high mortgage rates have pushed many hopeful buyers out of the market, slowing homebuying demand and putting downward pressure on home prices. But rates may start to drop next year, which would remove some of that pressure. The current supply of homes is also historically low, which will likely keep prices from dropping too far.
What happens to house prices in a recession?
House prices usually drop during a recession, but not always. When it does happen, it’s generally because fewer people can afford to purchase homes, and the low demand forces sellers to lower their prices.
How much mortgage can I afford?
A mortgage calculator can help you determine how much you can afford to borrow. Play around with different home prices and down payment amounts to see how much your monthly payment could be, and think about how that fits in with your overall budget.
Typically, experts recommend spending no more than 28% of your gross monthly income on housing expenses. This means your entire monthly mortgage payment, including taxes and insurance, shouldn’t exceed 28% of your pre-tax monthly income.
The lower your rate, the more you’ll be able to borrow, so shop around and get preapproved with multiple mortgage lenders to see who can offer you the best rate. But remember not to borrow more than what your budget can comfortably handle.