Rising Mortgage Rates: Causes And 2024 Rates Forecast

Last updated: January 2, 2024

We’re currently coming off a cycle of mortgage rates rising, though the market has recently started to swing the other way. Mortgage rates over time behave quite a bit like a swinging pendulum. Whether you’re a current homeowner or potential home buyer, it’s important to understand how mortgage rates work so you can take advantage of timing for your home loan.

What Causes Mortgage Rates To Increase?

There are a number of factors that can cause mortgage rates to rise. Several of them are actually interrelated.

• Housing market: Mortgage rates are based on demand for mortgage-backed securities (MBS) in the bond market. Predictions of a sharp rise in defaults on mortgage payments underlying these MBS may cause investors to be more inclined to stay away from the market, which would cause bond yields and rates to go up to attract investors again.

• Federal Reserve Bank: The major mandate of the Federal Reserve Bank (Fed) is to maximize employment while stabilizing prices. The primary avenue for balancing these often opposed goals is changing the target range for the federal funds rate. When the target range gets higher, mortgage rates rise along with many others.

• Inflation: A little bit of inflation keeps the economy going because people buy now, but too much can make the money you currently have worth substantially less than it was when you earned it. A higher federal funds rate makes it more expensive to borrow money. If people don’t have access to cheap funds, they spend less, and prices fall.

• Economic growth: Economic growth is undoubtedly great, but you can also have too much of a good thing. In boom times, the unemployment rate is low enough that employers may have a hard time finding workers, which leads to higher wages. Higher wages mean people may be willing to pay a higher price for goods and services, leading to inflation. The Fed may raise rates to slow economic growth and tamp down inflation.

How Are Interest Rates Determined?

Broadly speaking, there are two categories of items that impact the mortgage rate anyone gets. More specifically, there are market factors and personal financial profile factors.

Market factors are all about the interplay between the housing market, economic growth, the Federal Reserve and inflation. So everything mentioned in the section above has a major impact on daily movements in mortgage rates.

However, the second factor that you have much more control over is your personal financial profile. There are three big things any lender looks at when determining your personal interest rate: your down payment or equity, your credit score and how you plan to occupy the property.

Generally speaking, the higher your down payment (or amount of existing equity left in the home after a refinance), the better your rate is going to be. If your lender doesn’t have to give you as much money to fund the transaction, it’s less risky.

If you have a higher credit score, this means your borrowing history has shown you to be a financially responsible applicant who should be able to get a more favorable rate than someone with a credit score that’s noticeably lower.

It also matters how the home will be used. You’ll usually get the lowest rates on a primary home because if you get into trouble financially, lenders anticipate you’ll prioritize the payment on the home you live in. For this reason, you can expect a slightly higher rate on second homes and investment properties.

2023 Mortgage Rate Recap

In general, mortgage rates maintained a steady ascent throughout 2023. Only recently have mortgage rates fallen as a result of indications that the Federal Reserve will likely look to lower the federal funds rate at some point in 2024.

The following interest rates come from 2023 – the first week of January, the third week of June and the end of the year according to the Freddie Mac Primary Mortgage Market Survey®.

Mortgage Rate Forecast For 2024

Trying to predict mortgage rates is a bit like guessing whether a dog will go for a beef or peanut butter treat first. Your guess is as good as anyone else’s. While the market could go any which way, some prominent industry players have made predictions.

While they all continually update, some forecasters, like Freddie Mac and National Association of Home Builders, don’t break their predictions out by parts of the year.