How Expensive Will Mortgages Get in 2022?

Rates could continue to rise throughout the year.

Home buyers got to enjoy record-low mortgage rates during the latter part of 2020 when rates plunged in response to the economic downturn spurred by the pandemic. Meanwhile, rates were a notch higher in 2021 compared to 2020 but were still extremely competitive.

But now, we're starting off 2022 with higher mortgage rates than we saw at any point in 2021. And if you're in the market to purchase a home, you may be wondering what that means for your prospects.

Without a crystal ball, we can't predict how expensive borrowing for a home will get as 2022 moves along. But it is fair to say that rates could rise a bit beyond their current level.

As of this writing, the average 30-year mortgage rate is sitting at around 4.2%. But could the 30-year loan creep toward the 5% mark this year? It's certainly possible. Here are some reasons why.

1. Inflation

These days, just about everything is costing more money. And mortgage rates are no exception. Just as everyday consumers are incurring higher costs, so too are businesses. And so, mortgage lenders may need to pass some of those costs onto borrowers in the form of higher mortgage rates (or higher closing costs, which are the fees paid by borrowers to finalize a home loan).

2. The Federal Reserve is raising rates

The Fed has rate hikes planned for 2022, and while that won't impact consumers directly (since the Fed doesn't set consumer interest rates), it could have an indirect impact. That's because movement on the Fed's short-term borrowing rates tends to influence consumer interest rates, mortgage rates included.

3. The U.S. economy is recovering from the pandemic

During the heart of the pandemic, mortgage rates fell when economic conditions took a turn for the worse and buyers needed more of a break. Nowadays, the economy is stronger, with jobless rates largely returning to pre-pandemic levels. As such, lenders no longer need to keep rates at record lows.

What this means for you as a borrower

It's fair to assume that if you're going to be signing a 30-year mortgage this year, that you'll end up locking in a rate upward of 4% and possibly upward of 4.5%. Depending on your timing, you may even end up with a rate that's closer to 5%.

But while rates in this range might seem high, do remember that historically speaking, they're actually pretty competitive. Also, the rate you're able to snag on a mortgage will hinge heavily on how strong a borrower you present yourself as. If you come in with a high credit score and low debt-to-income ratio, you'll be more likely to get an attractive mortgage rate offer than you will with a lower credit score and a high amount of existing debt.

Shopping around could also be your ticket to big savings on a mortgage. Once you're ready to lock in a rate, contact several lenders so you can compare offers and identify the one that makes the most financial sense.