Over the last week, average 30-year fixed mortgage rates have risen to 7.11%.  This represents a 5 basis point increase from 7 days ago and is the highest level in nearly 8 months.  This also represents a substantial increase from the 6.3% rate reached in October 2024.

This represents a reversal from a prediction from the Mortgage Banker’s Association (MBA) that rates would dip below 6% by the end of 2024.  It was anticipated that the Fed’s September 2024 rate cut of 50 basis points would spur such declines in rates.  Instead, interest rates on 10-year Treasury bonds have increased steadily since that time.  While Fed rates do affect mortgage rates, mortgage interest is much more tightly correlated with the 10-year Treasuries.  

Unfortunately, we had hoped that sub-6% mortgage rates would help to “unfreeze” housing inventory.  There are large numbers of homeowners who would like to move to another home, whether moving up, downsizing, or relocating for other reasons.  However, these homeowners have mortgages at rates close to 3%, and they’re not willing to trade those for new mortgages in the 6-7% range.  Their living situation may make a move desirable, but they choose not to make that move.  We had hoped that mortgage rates in the 5-6% rate would be “low enough” to prompt homeowners to give up existing mortgages.  But in the short term, this will not likely be the case.

What’s in store for 2025?  Erika Giovanetti of USNews speculates that mortgage rates could go higher under inflationary policies of the new Trump administration.  Proposed tariffs are inflationary, and limits on immigration could keep labor costs high (also inflationary).  Also, if tax cuts exceed decreases in government spending, higher deficits could result, which also has the potential to increase inflation.

How can homebuyers mitigate higher mortgage rates?

Consider a 15-year mortgage.  15-year mortgages carry lower rates than 30-years while enabling borrowers to pay down their principal over a shorter timeframe.  If a borrower can afford the higher payments, they might be able to grind a rate below 6%.

Consider an ARM.  With a 5-1 ARM, the mortgage rate remains stable for 5 years and then fluctuates annually starting in the 6 year.  Current 5-1 ARMs carry an average rate of 6.5%, with some loans having rates closer to 6%.  This type of mortgage offers a more attractive rate to start, and if interest rates fall over the next 5 years, the loan could be refinanced at an even lower rate.

Ask the seller for points.  Most lenders allow borrowers to pay “points” upfront.  Each 1% of loan value paid buys a discount in the mortgage rate.  When negotiating with sellers, instead negotiating on price, buyers can ask those sellers to pay points, enabling the buyer to obtain a favorable mortgage rate.

Look for opportunities to assume a VA or FHA loan. Unlike conventional loans, these government loan programs are assumable. In this case, if the seller of a home has a low-interest mortgage they acquired years ago, the buyer can potentially assume that mortgage and continue to enjoy the low rate. However, there are some wrinkles. The purchaser must be able to qualify for the loan. Also, if the home has appreciated since the owner first purchased the home, the amount of the loan may be small relative to the home price, requiring a large down payment or a secondary loan. Finally, if the loan is VA, the purchaser must be VA-eligible or the seller must be willing to pass their VA eligibility to the buyer (a tall ask).