Why Americans Need to Brace for Higher Mortgage Rates

Borrowing for a home could get even more expensive.

For many months, prospective home buyers have been grappling with record-high home prices. The silver lining, though, is that mortgage rates have been competitive enough to help offset elevated home prices.

That could soon change, though. Rates were higher during the first two months of 2022 than they were at any point in 2021. And there's a good chance they'll continue to climb as the year moves along.

Prepare for mortgage rates to keep rising

As of this writing, the average 30-year mortgage rate is sitting at around 4.1%. Historically speaking, that's not a bad rate to lock in for a long-term home loan. But when we compare that to the rates that were available last year, it seems high.

Unfortunately, rates might continue to climb for one big reason: The Federal Reserve is expected to raise its short-term borrowing rates shortly, and once that happens, consumer interest rates, including mortgage rates, could follow suit.

Now to be clear, the Fed doesn't set consumer interest rates. Rather, it establishes the interest rate banks charge one another for short-term loans. But the actions of the Fed can definitely have an influence on consumer interest rates. In the near term, we could see an uptick in not just mortgage rates but also in borrowing rates for products like personal loans, home equity loans, and credit cards.

Should you put the brakes on your home search in light of rising mortgage rates?

If you're in a good financial position to purchase a home, then fears of rising mortgage rates shouldn't necessarily drive you out of the housing market. For one thing, while there's reason to expect mortgage rates to climb, that's not guaranteed to happen. And even if rates do climb, they may not rise to the point where borrowing becomes unaffordable.

Right now, as mentioned, the average 30-year mortgage is sitting at around 4.1%. For a $200,000 home loan, that translates into a monthly principal and interest payment of $967.

If rates climb so you're stuck with a 30-year mortgage at 4.5%, your monthly principal and interest payment on a $200,000 loan will amount to $1,013. All told, that's an extra $46 a month, or $552 a year. And while it's clearly preferable to spend less on a home than more, at the end of the day, $552 a year may not spell the difference between being able to afford a home or not.

In fact, rather than spend time and energy worrying about rising mortgage rates, you can instead take steps to help yourself snag the best rates out there. How? Raising your credit score could set you up for a lower borrowing rate, so work on paying all bills on time and whittling away at existing credit card debt to make that happen. Paying off debt can also lower your debt-to-income ratio, which is another factor mortgage lenders look at when approving loan candidates.

Shopping around for a mortgage could also result in nice savings. That could, in turn, make it possible to lock in affordable housing payments despite rising rates.