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Allow Me to Introduce You to the 5% Mortgage Rate


For those new to mortgages, the number five might feel a bit foreign.

Over the past decade and even longer, rates on the popular 30-year fixed mortgage have always been in the 2-4% range. We were spoiled.

Recently though, mortgage rates have jumped due to a variety of factors, including a strong economy, surging inflation, and the end of an accommodative monetary policy.

The latest setback is a very aggressive Fed, which has indicated a faster reduction in its bond and mortgage-backed securities (MBS) holdings.

We mostly knew that was coming, but not necessarily at the extreme pace signaled in Federal Reserve Governor Lael Brainard’s comments.

Why Are Mortgage Rates Going Up So Much?

  • Mortgage rates were engineered lower via the Fed’s QE monetary policy
  • They purchased billions in agency-backed mortgage-backed securities over recent years
  • The associated interest rates fell significantly, but also greatly increased the money supply, leading to worrisome inflation
  • The Fed has finally acknowledged the need to end this accommodative policy, which is spiking interest rates

Since 2008, the Federal Reserve has been buying mortgage-backed securities (MBS) in an effort to lower mortgage rates.

It worked, brilliantly, leading to record low mortgage rates never before seen in our lifetimes.

During early 2021, the 30-year fixed fell to its lowest level on record, an absurdly cheap 2.65%, per Freddie Mac.

The 15-year fixed also hit an all-time low of 2.10% during the week ended July 29th, 2021.

The good times rolled and mortgage lenders enjoyed record loan origination volume and profits.

But at some point, the Fed knew it would need to end this accommodative monetary policy known as quantitative easing (QE).

Because the dark side to ultra-low interest rates is inflation. And sooner or later it would need to be addressed.

It turns out they kicked the can down the road a lot longer than they maybe should have, partially due to the uncertainty surrounding COVID-19.

In any case, the low rate party abruptly ended after the Fed not only stopped buying MBS, but also indicated a reduction in its existing holdings.

As mentioned, the Fed has signaled a very aggressive approach to unwinding QE, which has sent shockwaves through the financial system.

The effect on mortgage rates has been unprecedented. The 30-year fixed averaged around 3% at the end of 2021, and is now closer to 5%.

Simply put, we’re experiencing payback for those low, low rates. It appears even worse on the way up than it was on the was down, in terms of velocity.

The jobs report released last week was also a show of strength for the economy, piling even more pressure on the Fed to act, and act fast.

The result has been mortgage rate carnage since the start of 2022, with the 30-year fixed finally breaching the 5% threshold.

Will Mortgage Rates Reverse Course Anytime Soon?

  • Since early 2022 the mortgage rate trend has been up, up, up
  • But that doesn’t mean there won’t be pullbacks along the way
  • Often major upward movements are met with a relief rally, at some point
  • So it’s certainly possible rates can reverse course in coming weeks or months

It’s the million-dollar question for which no one really has an answer to. Sure, there might be a lot of guesses, and educated ones at that, but that’s all they are.

The one thing I can say is that a lot of rate movement in a short period of time is often met with a pullback, though it could be a temporary one before the ascent continues even higher.

In other words, since mortgage rates jumped into the 5% space for the first time in nearly a decade, they may not stay there for very long, at least initially.

But the long-term trend could still be upward and onward, so the relief, if it even materializes, might be short-lived at best.

Yesterday, I pondered if mortgage rates had peaked, given their rapid rise. My conclusion was that they’ll probably fall, but could keep going up before they do.

In other words, things may get worse before they get better. So if you can wait to buy or refinance, it might be prudent.

Ultimately, any reversal could take months to play out, so buckle up. And don’t be surprised if the recent trend continues through the spring home buying season.

[Six Ways to Secure a Low Mortgage Rate Despite the Recent Jump]

A 5% Mortgage Rate May Look Pretty Good Once Rates Are 6%…

  • While a 5% mortgage rate sounds absolutely dreadful at the moment
  • It’s all relative to what we were used to seeing before
  • Imagine if mortgage rates rise to the 6% in the next few months (or sooner!)
  • We might wish we had that low 5% mortgage rate back

As noted, there could be a small window to secure a lower fixed mortgage rate in the near future because mortgage rates change daily. And volatility is certainly a possibility.

At the same time, a 5% mortgage rate won’t look so bad if the next stop in 6%.

Speaking of, the last time the 30-year fixed averaged 6% was back in 2008. It’s been about 14 years since consumers were used to such sky-high mortgage rates, though who actually had a 30-year fixed back then?

Everyone and their mother had an option arm, or at best a hybrid adjustable-rate mortgage. That brings up a good point though.

If fixed mortgage rates keep marching higher, and eventually land in the 6% range, might it be a tipping point for homeowners to consider an ARM instead of a fixed mortgage?

At the moment, ARMs are grabbing a measly 5-7% share of the mortgage market, but if and when fixed rates climb to 6% or higher, borrowers may decide to move into a product like the 5/1 ARM instead.

While they come with variable rates, they still provide several years of fixed-rate security, which makes them nothing like the toxic stuff we saw in 2006.

And the initial rate discount offered could keep housing affordability in check.

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