raising rates
Buying, Mortgage 101

2018 Mortgage Rate Outlook

Mortgage rates are always changing. They go up; they go down. For a 30-year fixed rate mortgage, rates peaked in 1981 at 18.63%, unheard of in today’s era of low-interest rates. Mortgage rates bottomed out in 2012 at 3.31%, according to Freddie Mac’s Primary Mortgage Market Survey.

If you’re buying a home, you need to pay close attention to mortgage rates. They have a significant impact on the cost of buying a home. As the rates increase, your monthly payments go up. When rates go down, the cost of a home declines. For 2018, experts are predicting rates will increase.

Increasing Home Costs

What influences mortgage rates?

A variety of factors influence mortgages. They can include inflation, unemployment, the overall health of the economy and competition between lenders. The largest ones by far, however, are Federal Reserve monetary policy and bond rates. Each basically influences a lender’s ability to borrow money. If it cost more for the lender to borrow money, those costs have to be passed onto the borrower.

For years, the Federal Reserve set interest rates at near zero, partially to offset the impacts of the 2008 financial crisis. That trend reserved itself in 2015 when the Federal Reserve began to slowly raise interest rates. The fed has increased rates a total of five times since 2015, and the central bank is expected to increase rates two or three times this year — but that is often hard to predict. Increasing rates put pressure on lenders to raise mortgage rates.

Bond rates have also been trending higher. The 10-year treasury bond, which the federal government sells, was 1.38% in July of 2016 and hovers around 2.75% in early 2018, rising faster than many experts had predicted. The Federal Reserve Bank of Philadelphia put out its forecast for 2018 in November of last year, and it did not expect 10-year treasury bonds to top 2.7% until the middle of the year.

“The expectation of future Fed rate hikes and increased borrowing by the U.S. Treasury is putting upward pressure on interest rates,” said Len Kiefer, Deputy Chief Economist at Freddie Mac.

What is the outlook for mortgage rates in 2018?

Every sign points towards mortgages rates trending higher in 2018, but many experts had predicted that mortgages rates would increase significantly in 2017. Mortgage rates gradually increased in late 2017 but only increased significantly in early 2018. In mid-February 2018, rates were 4.37% for a 30-year fixed rates mortgage. That’s the highest mortgages have been since 2014.

The Mortgage Bankers Association is expecting an increase in the 30-year fixed rate mortgage, but it is not expecting a significant increase. The organization predicts mortgage rates will be 4.6% by the middle of 2018 and 4.8% at the end of the year. Rates are not expected to rise above 5% until well into 2019 and only reach 5.3% by 2020.

“We expect that the 10-Year treasury rate will stay below 3 percent through the end of 2018, and 30-year mortgage rates will stay below 5 percent,” according to Mike Sorohan, an editor at the Mortgage Bankers Association.

Lawrence Yun, chief economist at the National Association of Realtors, believes mortgage rates will gradually climb to 4.5% by the end of 2018. “This will be the year mortgage rates make some measurable increases,” said Yun in a recent interview with CNN Money. “Not anything significant or alarming, but it could hit 4.5% by year-end, and that will tame some of the home-buying enthusiasm.”

Housing Lender Fannie Mae sees a sharper increase in rates. The organization predicts rates will increase to 4.5% in the second quarter, and end the year at 4.8%.

raising rates

What does that mean for housing pricing?

Some economists predict that the increase in mortgage rates could slow the rapid growth of housing pricing slightly in 2018. Buyers might shy away from purchasing a home when a mortgage has increased $100 or $200 a month.

At the same time, housing inventory, especially for first-time homebuyers, is incredibly small, and that has driven up prices. Multiple buyers are often competing for the same house. This is especially true in major metro areas like San Francisco, Boston, Washington, D.C., and Denver.

“Low supply is pushing prices higher and making homebuying less affordable in several parts of the country,” said Yun.

Experts say it’s best to talk with a lending specialist early in the homebuying process. Buyers can lock in an interest rate if they believe that interest rates will increase significantly before their home purchase has closed.

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James Shea is an award-winning journalist and author. He owns Media Lab, a content marketing and search engine optimization company is Richmond, Virginia.

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