Mortgage rates soared past 7% this week — here's what it means for you

House sold
(Image credit: Shutterstock)

On Thursday, mortgage rates soared to 7.08%, the highest level they’ve reached since 2002. 30-year rates are the most common home-loans on the market, and just a year ago rates were only 3.09%. Since January of this year, rates have jumped the highest they ever have in a single year, a whole 3.86 percentage points. Rates went from 3.22% to 7.08%, the highest they’ve been in two decades. 

The jump in mortgage rates comes as the Fed continues to increase interest rates to combat high inflation. Back in September, interest rates increased by 0.75%, bringing the federal funds rate to between 3% to 3.25%. These rates are expected to increase through 2023, with plans to raise rates another 0.75 percentage points next week. Unfortunately, these increased interest rates are weighing heavily on the housing market.

What this means for you

This increase in mortgage rates will be expensive for many potential buyers, so if you’re on the market for a new home, here are important things to consider. 

Monthly affordability

More buyers are holding off on home purchases at the moment, as increased mortgage rates mean increased monthly payments. So, while housing prices might be on the decrease, the most important thing to consider before buying a home is the price of your monthly payment. 

For example, a family with a median income of $71,000 could afford a $488,700 home with a 20% down payment, if mortgage rates were below 4%. As rates currently stand, around 7%, the same family would only be able to afford a $339,200 home.

If you do find something within your budget, make sure to lock in interest rates before they increase even more.

Down payment

Making a large down payment is one way to combat rising mortgage rates. Typically, the larger the down payment you make, the lower interest rate you’ll receive. Plus, if you make a down payment of more than 20%, you’ll be able to avoid private mortgage insurance (PMI), which can add 1% to 2% of the mortgage amount per year. 

Reducing the amount of money you’ll have to borrow will also make monthly payments lower and lower the amount of interest you'll pay over the course of the loan.

Adjustable-rate mortgage

Another option available for home buyers is to consider loans other than the standard 30-year fixed rate mortgage. For example, an adjustable-rate mortgage (ARM) could be a better option for you. An ARM offers a fixed rate for a certain amount of time, after which are annual rate adjustments.

ARMs come in different types, such as 7/10 meaning you’ll pay a fixed rate for the first seven years, after which your rate will change each subsequent year. Typically, initial rates for ARMs are lower than those offered on 30-year fixed rate loans.

This type of loan is a good choice especially for those who don’t plan to live in their home long term, as they’ll be able to miss out on the rate fluctuations after the fixed rate period. If you decide on taking out an ARM, you’ll also usually have time to refinance if rates end up decreasing.

Expand your search

Now is the time to expand your search when shopping for a home. Especially as home prices remain high, it's a good idea to consider areas in which home prices have remained relatively low in order to offset interest rates. 

This may mean looking at other neighborhoods or suburbs you haven’t yet considered, as well as finding places with lower HOA dues or property taxes. 

As mortgage rates rise, also consider other options, like condos and townhomes, which typically remain more affordable than houses. You may even want to purchase a fixer-upper, something less expensive in which you can add value over time 

As always, it’s important to shop around for the best deals right in order to help balance out high mortgage rates. 

Need some more help getting dealing with this tough economy? Check out 5 ways to battle inflation and learn about high-yield savings accounts and how they can help you. 

Erin Bendig
Staff writer, personal finance

Erin pairs personal experience with research and is passionate about sharing personal finance advice with others. Previously, she was a freelancer focusing on the credit card side of finance, but has branched out since then to cover other aspects of personal finance. Erin is well-versed in traditional media with reporting, interviewing and research, as well as using graphic design and video and audio storytelling to share with her readers.