With Mortgage Rates Cresting 3.50%, Will a Fed Rate Hike Drive Them Higher?

U.S. residential 30-year mortgage rates are now above 3.50%, on average according to Freddie Mac. That's still a relatively low figure to homeowners who have experienced mortgage rates of 4%, 5% or even 6% in their lifetime, but it's also a three-month high, Freddie Mac reports.


"The 10-year Treasury yield rose 18 basis points to 1.73%, its highest level since Brexit," says Sean Becketti, chief economist at Freddie Mac. "The 30-year fixed-rate mortgage followed suit, rising 6 basis points to 3.50% this week. This is the first week since June that mortgage rates were above 3.48%, snapping an 11-week trend."


In a way, mortgage rates are being held hostage by the ongoing debate on if and when the Federal Reserve will raise interest rates, experts say.

"Though mortgage rates have remained at historic lows, they have ticked up slightly in the past two weeks," says Whitney Fite, President of Angel Oak Home Loans, a retail mortgage lender.

Fite believes that's mostly due to the daily argument over when the Fed will raise rates, as sentiment changes daily over the scrutiny of every economic report that is released. "In 2017, I expect rates to hold at historically low levels," Fite says. "Market participants are expecting two to three rate hikes between now and the end of next year, and there continues to be global demand for U.S. Treasuries even at their currently low levels. I would say 30-year rates will be in the low to mid-4% level and the 15-year in the high three percent level."

If the Fed acts sooner rather than later, that could further spur home mortgage rates even higher.

"Specifically, on this week's FOMC meeting, market participants are only pricing in a 20% change of tightening at Wednesday's meeting and a 55% chance of tightening by year-end," Fite says. "If they raise rates this week, it would come as a surprise and would lead to slightly higher rates since a September hike is not priced in to the mix."

Other mortgage industry insiders say that, given all the uncertainty about interest rates right now, homebuyers may want to pull the trigger now.


"I have never been a fan of locking on before a Fed rate meeting, but I am leaning that way today," says Victor Burek, a mortgage specialist at Churchill Mortgage, in Dallas. "Potential volatility remains at least through this Wednesday's Fed meeting. The trend continues to not be our friend right now. If your lender pricing is better today, I would lock."


Homebuyers should also set a "breaking point" on mortgage rates, where you would go ahead and act if rates reached a specific level, like 3.75% or 4.0%.


"Time horizon and risk tolerance are two variables to consider when it comes to locking," says Robert Johnson, president and CEO at The American College of Financial Services, in Bryn Mawr, Pa. "If you have plenty of time and don't mind losing some ground, set a limit as to how much higher rates could go before you'd lock to avoid further losses, and then float in the hopes of never seeing that limit."

"In the shorter-term, it's always good to look for lock opportunities after rates have been moving lower or sideways repeatedly, especially if they've since begun to move back up in any sort of consistent way," Johnson adds.

Additionally, homebuyers still may more time than they think on mortgage rates, at least as far as a potential Federal Reserve rate hike.

"The Fed [rate hike] looks most likely to hike in December," says Josh Wright, chief economist at iCIMS. "The Fed has to be prepared to raise rates because we seem to be around the full employment level where traditional models predict inflation to take off, but the Fed seems to be coming around to the idea that the economy is going through a profound transition, and the old relationships may not hold anymore. Even as we hear that wage pressures appear to be broadening, some at the Fed are questioning even the relationship between wages and broader price pressures."


"The market-implied probability of a hike in September is quite low, and even a December hike is close to 50-50," Wright adds. "There are many uncertainties for investors to worry about, but the prospect of Fed tightening probably isn't at the top of the list."

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