Mortgage rates hit their highest level since before the pandemic began this week, adding increasing pressure on both homeowners and buyers.
Further increases could be on the horizon.
The rate on the 30-year fixed mortgage rose to 3.69%, up from 3.55% last week, according to Freddie Mac. That’s the highest point since the first week of January 2020 and well below the 2.73% it averaged a year ago.
The more than half-point jump in rates since the start of the year likely will price out many young and moderate-income first-time homebuyers just as the spring housing season is set to begin. The rise in rates also closes the door on many homeowners looking to refinance.
“Just one year ago home prices would have been essentially 15% less than they are right now,” chief economist and senior vice president of research for the National Association of Realtors, Lawrence Yun, told Yahoo Money. “Given the recent price increases, the first-time homebuyers are feeling the pinch of rising home prices. Now they are going to feel the double-pinch from rising mortgage rates. It will be quite a challenge for first-time buyers.”
‘People of moderate income are especially struggling’
Rising mortgage rates are just the latest obstacle locking out entry-level buyers who are already contending with increasing home prices and limited inventory.
“Real estate markets are caught in a lopsided dynamic with many buyers eager to find the right home before rates rise even higher, but very few available homes for sale as a result of almost a decade and a half of underbuilding,” said George Ratiu, Realtor.com’s manager of economic research. “The benefits that ultra-low interest rates provided over the last two years are wearing off and affordability is becoming a huge hurdle for many buyers.”
For instance, the monthly principal and interest to purchase the average-priced home with 20% down reached a record-high of $1,454, up $350 — or 32% — from a year ago, according to Black Knight. It now takes 25.8% of the median household income to make that payment on a 30-year fixed mortgage, up 22.4% from the required amount at the end of the third quarter last year.
Already, some buyers are pulling back as sentiment about the market plummets.
The volume of mortgage applications to purchase a home last week dropped 10% from the previous week, according to the Mortgage Bankers Association (MBA).
“The repeat buyers are less affected, it's the first-time buyers that are really struggling with the rising mortgage rates and housing prices,” Yun said. “Within the first-time buyers, people of moderate income are especially struggling.”
'Trying to take cash out of their homes'
Homeowners also have fewer opportunities to lock in a lower rate. The rate on the 15-year fixed-rate mortgage – often a popular choice for refinance – increased to 2.93% this week, up from 2.77%.
Refinance activity dropped 7% last week from the prior one, MBA found, with refinance applications making up 56.2% of all mortgage applications, down from 57.3% the previous week.
The population of high-quality refinance candidates who could shave three-quarters of a point from their mortgage rate dropped to 5.1 million, according to new figures Black Knight gave Yahoo Money, down from 5.9 million last week.
Cash-out refinances still remain popular, as homeowners tap newfound wealth. Homeowners gained a record amount of home equity last year as housing prices surged.
“More and more borrowers are trying to take cash out of their homes with values rapidly increasing. Investors are pulling on the investment properties as well,” Pava Leyrer, president of Northern Mortgage, told Yahoo Money. “We expect this to taper off as rates keep rising but even in the 4% range, it is still very reasonable money depending on what you are doing with it.”
Future of rates
Rates could get that high. Already, they are set to increase again next week.
The yield on the 10-year Treasury — which fixed mortgage rates tend to track – rose on Thursday morning after a government report showed inflation for January hit a new 40-year high. The figures from the Bureau of Labor Statistics lend even more support for the Federal Reserve to help drive interest rates higher to combat rising prices.
That would, in turn, boost mortgage rates.
"The 4% mortgage rate is a distinct possibility,” Yun said, “especially in the second half of the year.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.