Will Mortgage Rates Keep Soaring in 2023?

It's a big question on prospective buyers' minds.

There's a reason so many people wanted to buy a home in 2021. Last year, mortgage rates were quite attractive, and even though real estate prices were through the roof, borrowing rates were low enough to make homeownership appealing.

This year, we're looking at very different mortgage rates than what borrowers enjoyed in 2021. At the start of the year, the average 30-year mortgage rate was somewhere around 3%. These days, buyers are looking at more like 7% for a mortgage with that same term.

Clearly, that's a world of difference. And it also explains why mortgage demand has dropped significantly this year. But while we know what mortgage rates look like at present, the big question is whether they'll keep rising in 2023. And while we don't have a crystal ball, we can make some predictions.

Rates could keep rising, but probably not to the same extreme

For the 30-year mortgage to go from 3% to 7% within an 11-month time frame is pretty drastic. And unfortunately, rates have the potential to keep climbing.

If the Federal Reserve keeps raising its benchmark interest rate -- a tactic it's employed this year in an effort to slow the pace of inflation -- then it could lead to higher borrowing costs across the board. And that includes mortgages.

But while there's a chance mortgage rates could continue to climb in 2023, they're unlikely to jump at the rapid pace we've seen this year. First of all, if rates were to rise at the same rate, buyers would potentially be looking at 10% or 11% interest on a home loan by the end of 2023. And it's fair to say that if rates get that high, mortgage demand might plummet to an extreme, to the point where some lenders are driven out of business.

Also, if the rate of inflation starts to cool, the Fed is likely to slow down its rate hikes or stop that practice altogether. Once that happens, borrowing costs have the potential to drop back down. So while we could see mortgage rates rise at the start of 2023, or even throughout the first half of the year, there's a good chance they'll change direction mid-year.

This doesn't mean we should expect mortgage rates to dip back down to the 3% range next year. But is it possible we'll see 5% mortgage rates by the end of 2023? It's fair to say yes.

How to navigate today's sky-high mortgage rates

If you're looking to buy a home, you may be at the point where you're ready to pause your house hunting due to the unbelievably high cost of borrowing. But one thing you should remember is that mortgage rates have a tendency to fluctuate over time. That means they could rise, but also, they could fall. And when the latter happens, you have an opportunity to refinance.

If you're in a strong financial position to buy a home -- you have plenty of money for a down payment, a steady job, and an emergency fund in case near-term repairs pop up -- then you may want to move forward with a home purchase despite the high cost of borrowing today. Chances are, you'll be able to refinance your mortgage at some point and lower your monthly payments. And as long as you can afford those higher payments for the time being, you might really enjoy some of the other benefits that come with buying a place of your own.