Consumers can expect higher borrowing costs across the board after the Federal Reserve announced it would raise its short-term benchmark rate for the first time in three years, financial analysts say. The Fed increased its target federal funds rate by a quarter of a percentage point Wednesday after it had been near zero. The central bank is expected to increase its rate six more times by the end of the year as it tries to tame the highest inflation in 40 years.

The Fed’s rate—which is the interest rate at which banks lend to one another—often indirectly influences mortgage rates. The rates on long-term fixed-rate mortgages are expected to move higher, and the average 30-year fixed-rate mortgage, which is above 4%, likely will continue to increase, Jacob Channel, senior analyst at Lending Tree, told CNBC.

CNBC offered an example of how that could impact borrowers: On a $300,000 30-year mortgage with a 4% rate, borrowers may pay about $1,432 a month. If that rate rose to 4.5%, that same mortgage would cost $1,572 a month. Financial experts recommend that borrowers with an adjustable rate mortgage refinance into a fixed rate before any further increases.

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As mortgage rates rise, levels below 4% for the most popular 30-year fixed-rate mortgage are likely to remain in the rearview mirror. The 30-year fixed-rate mortgage averaged 4.16% this week, Freddie Mac reports.

“The 30-year fixed-rate mortgage exceeded 4% for the first time since May of 2019,” says Sam Khater, Freddie Mac’s chief economist. “The Federal Reserve raising short-term rates and signaling further increases means mortgage rates should continue to rise over the course of the year. While home purchase demand has moderated, it remains competitive due to low existing inventory, suggesting high house price pressures will continue during the spring homebuying season.”

Higher mortgage rates are likely to affect many aspiring home buyers, especially first-timers, says Nadia Evangelou, NAR’s senior economist and director of forecasting, on the association’s blog. Since the beginning of this year, nearly 6.3 million households have been priced out of the housing market, 2 million of whom are millennials.

Freddie Mac reports the following national averages with mortgage rates for the week ending March 17:

• 30-year fixed-rate mortgages: averaged 4.16%, with an average 0.8 point, up from last week’s 3.85% average. Last year at this time, 30-year rates averaged 3.09%.
• 15-year fixed-rate mortgages: averaged 3.39%, with an average 0.8 point, increasing from last week’s 3.09% average. A year ago, 15-year rates averaged 2.40%.
• 5-year hybrid adjustable-rate mortgages: averaged 3.19%, with an average 0.2 point, increasing from last week’s 2.97% average. A year ago, 5-year ARMs averaged 2.79%.
• Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining a mortgage.

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Despite increasing equity, fewer homeowners are taking out home equity lines of credit. A March 18 report from ATTOM Data Solutions shows the number of HELOCs issued in the fourth quarter of 2021 was down 5.5% from the previous quarter, and 4.2% below the level issued in the fourth quarter of 2020.

HELOC mortgage originations fell from the third quarter to the fourth quarter of 2021 in 68% of the metro areas tracked. The largest decreases were in Atlanta (down 36.1%); San Antonio (down 23.3%); Houston (down 19.1%); Austin, Texas (down 18.5%); and St. Louis (down 15.9%).

But homeowners in some locales seem more apt to take advantage of their growing equity and to take out HELOCs in larger numbers.

The largest quarterly increases in HELOCs among metro areas with at least a population of 1 million in the fourth quarter of 2021 were in: Cleveland (up 32.7%); Buffalo, N.Y. (up 24.3%); Raleigh, N.C. (up 21.7%); Philadelphia (up 13.5%); and Detroit (up 10.6%).

A separate study from LendingTree(link is external) analyzed the top motivations for homeowners to reach for their equity. Fifty percent of homeowners seeking a HELOC across 50 metros cited home improvements as their primary reason. Twenty-four percent of homeowners say they would use equity to help consolidate their debt.

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Higher home prices are overshadowing potential savings from historically low mortgage rates, according to a new analysis by CoreLogic, a real estate research firm.

“[The] 2020–2021 pandemic housing market recorded the fastest annual home price appreciation in the 45-year history of the index,” Yanling Mayer, principal economist for CoreLogic, writes in a March 18 analysis on the company’s website.

Record-low mortgage rates are often cited as helping to boost affordability in the current market. But how much have low rates helped?

Buyers who financed their purchases using FHA loans, which tend to skew toward first-timers, have seen a rapid rise in typical monthly payments, despite record-low interest rates, Mayer writes. During the second half of 2021, the typical monthly out-of-pocket cost for those using FHA financing was $1,710—up by 19.7% from the rates just before the beginning of the pandemic, CoreLogic reports.

Monthly payments on homes purchased with VA loans posted a double-digit increase as well, jumping 11.3% from pre-pandemic levels, the analysis reports.

However, buyers who have financed their purchases using conventional loans have locked in more savings from lower interest rates. They’ve seen monthly payments rise by 3.3%, or $57 per month, in comparison.

“Many of these home buyers are likely repeat or trade-up buyers who were able to afford a large down payment to obtain a more favorable interest rate,” Mayer writes. “First-time home buyers often use FHA loans for financing lower-priced starter homes, and the surge in starter home prices has inadvertently eroded affordability and contributed to pricing out families who hope to become first-time homeowners.”

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First-time buyers and veterans may be facing increasing obstacles to affording homeownership. In response, mortgage applications for home purchases involving Federal Housing Administration and Veterans Affairs loans are falling. The loans tend to be popular with first-time buyers, veterans, and those with lower incomes less able to pay a large down payment for a home purchase.

“First-time home buyers who rely on these government programs are increasingly challenged by both the rapid increase in home prices and higher mortgage rates,” Mike Fratantoni, chief economist of the Mortgage Bankers Association, said in a statement.

A survey by the National Association of REALTORS® in the summer of 2021 showed house hunters using conventional financing were edging out buyers using government-backed loans. Eighty-nine percent of sellers would be more likely to accept an offer from a buyer with conventional financing. Only 30% said they would be willing to accept one using an FHA or a VA loan.

Buyers who are making an offer using FHA or VA financing are finding it difficult to compete against buyers who are offering cash or using conventional financing. Some real estate pros say it’s because VA and FHA loans tend to have low appraisals, problematic when home prices are rising fast and homes are selling quickly. Also, government-backed loans tend to be slower to close.

Nevertheless, mortgage demand softened across the board last week, regardless of loan type, with economists pointing to a sharp increase in mortgage rates.

Total mortgage application volume dropped 8.1% last week compared to the previous week, the MBA’s seasonally adjusted index shows. Also, the average contract interest rate on a 30-year fixed-rate mortgage with conforming loan balances rose to 4.50%, a significant jump from 4.27% the previous week and from the below-4% rates that were more common at the beginning of the year.

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Elevated inflation and the Federal Reserve’s monetary tightening policy drove the latest leap in mortgage rates this week. Since the beginning of this year, mortgage rates have jumped by 1.2%. The typical home buyer would need to spend $250 more every month to be able to purchase a home, Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the association’s blog.

The 30-year fixed-rate mortgage moved up to a 4.42% average this week, more than a quarter of a percentage point compared to last week, Freddie Mac reports in its latest mortgage market survey. Rates continued to rise across loan types. “Rising inflation, escalating geopolitical uncertainty, and the Federal Reserve’s actions are driving rates higher and weakening consumers’ purchasing power,” says Sam Khater, Freddie Mac’s chief economist. “In short, the rise in mortgage rates, combined with continued house price appreciation, is increasing monthly mortgage payments and quickly affecting home buyers’ ability to keep up with the market.”

Freddie Mac reports the following national averages with mortgage rates for the week ending March 24:

• 30-year fixed-rate mortgages: averaged 4.42%, with an average 0.8 point, rising from last week’s 4.16% average. Last year at this time, 30-year rates averaged 3.17%.
• 15-year fixed-rate mortgages: averaged 3.63%, with an average 0.8 point, increasing from last week’s 3.39% average. A year ago, 15-year rates averaged 2.45%.
• 5-year hybrid adjustable-rate mortgages: averaged 3.36%, with an average 0.3 point, increasing from last week’s 3.19% average. A year ago, 5-year ARMs averaged 2.84%.

Freddie Mac reports average commitment rates along with average points to better reflect the total upfront cost of obtaining a mortgage.

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