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Mortgage Rate Predictions for 2022

Read Time: 6 Minutes February 15, 2022

PSA: Industry experts say mortgage rates are changing in 2022.


Over the past couple of years, mortgage rates have been sitting still at near historic lows. Low mortgage rates provide home buyers with opportunity to run full speed ahead toward homeownership at a lower cost of borrowing. Low rates enable home buyers to reap the benefits of lower interest monthly payments, and compared to higher rates, savings can amount to thousands of dollars over the life of the loan.

History shows that there are periods of lower and higher rates, as the market from a zoomed-out scope is always in flux. When there are periods of lower rates, it’s important to note that low rates do not sustain indefinitely. Having said that, predictions for 2022 point to rising mortgage rates; there are a few different reasons mortgage rates could trend upward.

If you’re in the market to buy a new home or refinance, even later this year, it’s a good idea to consult with a mortgage professional and gather information based on market predictions.

So, the question now is, where exactly are mortgage rates headed? The good news is that predictions from industry experts are pointing to higher rates, but not astronomically higher. Let’s dive deeper.

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The Fed is Fighting Inflation – Expect to see Rates Climb

First, what is the Federal Reserve? The Federal Reserve (Fed) is the central bank of the United States that serves to regulate the U.S. banking system and economy. Among their 5 general functions, the Fed “conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.”


Second, what is inflation? Simply put, inflation is when the price of goods and services increase over time. In the past couple of years, you may have noticed that the cost of goods, from furniture to food to houses, has increased overall. And in short, this is explained by inflation, one of the largest scale economic impacts of supply and demand. In conjunction with inflation and supply chain challenges, we’ve seen a higher demand of goods and a shortage of supply. We’ll break down how inflation and interest rates coincide later.

So, what has happened? In March 2020, the Fed cut its key interest rate (which is the rate at which banks borrow from each other when they need funds overnight) to near zero to help stimulate economic growth and sustainability. This rate is not the same as a mortgage rate. However, when the cost of banks and financial institutions borrowing from each other is near zero, mortgage rates are typically lower for consumers as well – meaning the cost of borrowing (and the monthly mortgage payment) is less.

At this time, the Fed also issued a plan to place billions of dollars into a reparative quantitative easing (QE) program, which included billions worth of asset purchases – treasuries and mortgage-backed securities (MBS). Why is this important? The purchase and sale of MBS influence mortgage rates.

The key interest rate was lowered in early 2020 to stimulate economic growth, mortgage rates dropped, and the lower cost of borrowing money to purchase a home created a higher demand in the housing market. As a result, many areas across the country experienced a competitive market with low inventory, as the price of homes surged (again, supply and demand at work). The housing market, albeit a booming industry during this time, has been a huge factor among the Fed’s inflation concerns.

Translation: During an economic downturn that presented itself at the beginning of the pandemic, the Fed reacted and began supporting the flow of the economy, including the housing and mortgage market, at large. Fast forward to 2022: the Fed is making key decisions that impact the economy (and housing market!) moving forward.


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Inflation is Continuing to Rise

For perspective, the Federal Reserve’s target inflation rate is 2%, and in 2021, the annual inflation rate was 7%. The Fed influences and attempts to control the rate of inflation by setting, monitoring, and adjusting the federal funds rate. On January 26, 2022, Fed Chairman Jerome Powell stated, “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”


While the Fed has yet to announce what increase to the federal fund rate will be, they’ve stated that there will be an upcoming increase. When this happens, it’s likely that mortgage rates will increase, too.


How are Interest Rates Related to Inflation?

Interest rates are used to curb inflation by increasing the cost of borrowing. Generally, when interest rates are lower, the economy experiences growth, and inflation increases. On the flip side, when interest rates are higher, generally, economy growth slows down, and inflation decreases. Reminder: The Fed sets interest rates and strives to keep inflation at bay.


Look to the Bond Market

As stated earlier, the Fed has been purchasing mortgage-backed securities (billions of dollars worth) since early 2020, which are, in simple terms, packages of mortgages bundled up and sold to investors in the bond market. The Federal Open Market Committee (FOMC) is the committee within the Federal Reserve makes key decisions about interest rates. On January 26, 2021, “The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March.” What does this mean? The Fed plans to taper its purchasing of bonds and mortgage-backed securities. Experts have weighed in and think this strategy may contribute to rising mortgage rates.


How Much Will Rates Rise?

While a mortgage rate forecast can never be an exact science, industry experts have been making their own predictions based on economic history and the Fed’s recent announcements.

The National Association of Realtors predicts the 30-year fixed rate mortgage will rise slowly up to near 3.5% in the first half of the year and 3.9% by the end of the year.

Freddie Mac predicts the 30-year fixed rate mortgage to average 3.6% in 2022.

The Mortgage Bankers Association (MBA) predicts the 30-year fixed rate mortgage rates to climb to 4% by the end of 2022.

At the end of 2021, the average 30-year fixed rate mortgage was 3.11%. So, while interest rates are predicted to rise, industry experts do not foresee skyrocketing rates – a sigh of relief!


COVID’s Continuous Impact

Thus far, the pandemic has resulted in major economic shifts, which have led to a spike in the housing market and an increase in mortgage applications. While rates are changing and predicted to rise based on further adjustments set by the Fed, the mortgage market remains relatively stable – an environment ideal for home buyers and homeowners to pursue their homeownership dreams. The FOMC stated, “The path of the economy continues to depend on the course of the virus.” The Fed plans to announce updates and adjustments to promote a thriving economy throughout the year.


Home Prices are Rising

Low mortgage rates have created a demand in the mortgage market, which created a demand in the housing market. Without a supply of homes that meets buyer demand, home prices are driven upward. Freddie Mac reported, “As economic recovery continues going into the spring and summer, mortgage rates are expected to resume their upward trajectory. In the meantime, recent data suggests that homebuyer demand continues to be elevated as supply remains low, driving higher home prices.” But is renting any better?


Rent vs Buy: Is Renting Better Right Now?

Owning a home has financial benefits over renting. When you rent, your monthly payment is contingent on ever-rising rates set by your landlord. When you own, you can lock in a fixed-rate and have stable monthly payments for the life of the loan. Secondly, when you rent, you don’t benefit from the home price appreciation that occurs throughout years of homeownership. Locking in a lower mortgage rate right now could mean you build wealth in the long run, as opposed to renting, which inhibits you from building equity and long-term wealth. All in all, owning a home can increase financial security.


Is Now a Good Time to Buy a House or Should I Wait?

Because rates are still low and predicted to move higher, now is an opportune time to review your financing options with a lender. It’s simple: The lower the rate, the lower the monthly payment. The lower the monthly payment, the higher the savings!


What about Refinancing?

While rates appear to be on the rise, they are still relatively low. Many homeowners are taking advantage of the lower-rate climate now to reap the most financial benefits possible.

 Remember: You have options that pave the path toward more money.
1. Lower your interest rate to lower your monthly payment: Refinance.
2. Get a lump sum of cash out from your home’s equity: Cash-Out Refinance.
3. Shorten your loan term and own your home sooner: Refinance.


At this point, it’s safe to conclude that you’re in-the-know on mortgage rate predictions for the year based on reported information thus far. If you’re ready to take the next step toward your new home (or more money!), our team is happy to discuss what today’s rates mean for you, and then help you lock in the lowest rate possible. Let’s get started!

Learn more in our other educational series.

We’ve assembled a treasure trove of jargon-free information to demystify home-financing and arm you with valuable insights and actionable options.

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