Mortgage rates increased this week, and the latest inflation numbers suggest it will be a while before we see rates drop drastically.
Late last week, the Bureau of Labor Statistics released the core Personal Consumption Expenditures (PCE) index, which removes the cost of food and energy when looking at inflation. Inflation rose by 2.8% year over year in March, which is 0.1% more than experts predicted.
Why is this seemingly tiny number significant? Because the Federal Reserve needs to see inflation decrease before it cuts the federal funds rate — and not just for a month or two. The Fed wants to see longer-term decreases in inflation before it makes any big moves. At its meeting tomorrow, we expect the Fed to announce that its rate is staying the same for now.
What does this mean for potential homebuyers? Don’t count on rates dropping during the spring and summer home-buying season. If locking in a low rate is your main goal, hold out for later in 2024 or even into 2025. But if you’re otherwise financially ready to buy a house, consider buying now and refinancing into a lower rate in two or three years.
Dig deeper: Is it a good time to buy a house?
Today’s mortgage rates
According to Freddie Mac, the national average 30-year mortgage fixed rate this week is 7.17%, up seven basis points from the previous week.
The average 15-year fixed rate inched up too. It is 6.44%, a five-basis-point increase from the week prior.
30-year vs. 15-year fixed mortgage rates
As a rule of thumb, 15-year mortgage rates are lower than 30-year mortgage rates. When comparing 15- versus 30-year mortgage rates, know that the shorter term will save you money on interest in the long run. However, your monthly payments will be higher because you’re paying off the same loan amount in half the time.
For example, with a $400,000 30-year mortgage and a 7.17% rate, you’ll make a monthly payment of $2,707.03 toward your mortgage principal and interest. As interest accumulates and compounds over decades, you’ll end up paying $574,532 in interest.
If you get a $400,000 15-year mortgage with a 6.44% rate, you’ll pay $3,471.25 monthly toward your principal and interest. However, you’ll only pay $224,825 in interest over the years.
Learn more: How much money do I need to buy a house?
Fixed-rate vs. adjustable-rate mortgages
With a fixed-rate mortgage, your rate is locked in from day one. You will get a new rate if you refinance your mortgage, though.
An adjustable-rate mortgage keeps your rate the same for a set period of time. Then the rate will go up or down depending on several factors, such as the economy and the maximum amount your rate can change according to your contract. For example, with a 7/1 ARM, your rate would be locked in for the first seven years, then change every year for the remainder of your term.
Adjustable rates typically start lower than fixed rates, but once the initial rate-lock period ends, you risk your interest rate going up.
Will mortgage rates go down in 2024?
In Fannie Mae’s April rate forecast, the government-sponsored enterprise said it expects 30-year fixed rates to end 2024 at 6.4%. The Mortgage Bankers Association also predicts the rate will drop to 6.4% by the end of the year. So while rates will likely go down in 2024, the drop might not be as drastic as people had previously expected.
The trajectory of future mortgage rates will largely depend on the Federal Reserve’s decision on whether or not to cut the federal funds rate at its meetings throughout the year. The federal funds rate doesn’t directly impact mortgage rates, but it is a good indicator of how the economy is doing overall. So when the Fed rate drops, mortgage rates typically go down too. The Fed will announce a decision about the federal funds rate tomorrow, and most experts predict the central bank will keep the rate the same rather than cut it.
Learn more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards