The wind continues to blow in the wrong direction for mortgage borrowers. — Greg McBride, Bankrate Chief Financial Analyst

As homebuyers grapple with record prices this spring, mortgage rates have also crept up. On a 30-year fixed loan, the average rate was 7.39 percent as of May 1, according to Bankrate’s survey of large lenders, marking three straight months of 7 percent rates.

Blame inflation. It’s still stubbornly elevated, rising to 3.5 percent in March, and that’s led to dialed-back expectations about how quickly the Federal Reserve cuts rates this year, if at all. The central bank left rates unchanged at its latest meeting concluding May 1.

Meanwhile, the unemployment rate was 3.98 percent in March, while economic growth slowed to 1.6 percent in the first quarter of 2024.

All of these factors have added up to an uncertain timeline for the Fed, prompting investors to bid up 10-year Treasury yields, the informal benchmark for 30-year fixed mortgage rates.

Mortgage rate predictions May 2024

As May ushers in peak real estate season, forecasters aren’t anticipating a break from the current spate of 7 percent mortgages.

“The wind continues to blow in the wrong direction for mortgage borrowers,” says Greg McBride, Bankrate’s chief financial analyst. “Rates have spiked as inflation runs hot, the Fed timetable for interest rate cuts gets pushed back and the supply of government debt rises. Expect mortgage rates to remain well above 7 percent in May, and maybe closer to 8 percent if the run of disappointing inflation data continues.”

Rates last hit 8 percent in October 2023. At that rate and the current median home price of $393,500, a borrower putting 3 percent down would pay about $250 more a month compared to a 7 percent loan.

While the Fed doesn’t establish 30-year mortgage prices, its moves can have immediate ripple effects, says Robert Frick, corporate economist at Navy Federal Credit Union.

“We shouldn’t expect relief from current high mortgage rates in May,” says Frick. “The root cause is inflation, which remains stubborn and is likely to hold steady for now. This in turn means the Fed won’t be cutting its rates any time soon, and cutting those rates would quickly filter through to the mortgage market.”

The Fed delay has upended 2024 forecasts that once called for rates below 6 percent.

“The early 2024 expectations for sharp Fed rate cuts are now highly unlikely to happen,” says Selma Hepp, chief economist at CoreLogic. “As the economy continues to grow, we expect the Fed to keep rates higher for longer. The best we can hope for at this point is rate cuts late in the year and mortgage rates to fall to the mid-6 percent range.”

“We’ll need a succession of improved inflation readings before we can hope for a sustained move below 7 percent in mortgage rates,” says McBride.

The average rate on a 30-year mortgage was 7.39 percent as of May 1, according to Bankrate’s survey. While that’s a welcome drop from 8.01 percent on Oct. 25 of last year, it’s still higher than the sub-7 percent rates seen in January.

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Bankrate’s weekly mortgage rate averages differ slightly from the statistics reported by Freddie Mac, the government-sponsored enterprise that buys mortgages and packages them as securities. Bankrate’s rates tend to be higher because they include origination points and other costs, while Freddie Mac removes those figures and reports them separately. However, both Bankrate and Freddie Mac report similar overall trends in mortgage rates.

When will mortgage rates go down?

Overall, forecasters predict mortgage rates to continue easing, but not as much as previously thought.

While McBride had expected mortgage rates to fall to 5.75 percent by late 2024, the new economic reality means they’re likely to hover in the range of 6.25 percent to 6.4 percent by the end of the year, he says.

Mortgage giant Fannie Mae likewise raised its outlook, now expecting 30-year mortgage rates to be at 6.4 percent by the end of 2024, compared to an earlier forecast of 5.8 percent.

“A lot of us forecasted we’d be down to 6 percent at the end of 2023,” says Lisa Sturtevant, chief economist at Bright MLS, a large listing service in the Mid-Atlantic region. “Surprise, surprise, we [weren’t].”

One variable has been the unusually large gap between mortgage rates and 10-year Treasury yields. Normally, that spread is about 1.8 percentage points, or 180 basis points. This year, the gap has been more like 280 basis points, pushing mortgage rates a full percentage point higher than the 10-year benchmark indicates.

“There is room for that gap to narrow,” says Sturtevant, “but I’m not sure we’ll get back to those old levels. In this post-pandemic economy, the old rules don’t seem to apply in the same ways. We’re sort of figuring out what the reset is. Investors have a different outlook on risk now than they did before the pandemic. We’re just in this weird transition economy.”

What to do if you’re getting a mortgage now

Mortgage rates are at generational highs, but the basic advice for getting a loan applies no matter the economy or market:

  • Improve your credit score. A lower credit score won’t prevent you from getting a loan, but it can make all the difference between getting the lowest possible rate and more costly borrowing terms. The best mortgage rates go to borrowers with the highest credit scores, usually at least 740. In general, the more confident the lender is in your ability to repay the loan on time, the lower the interest rate it’ll offer.
  • Save up for a down payment. Putting more money down upfront can help you obtain a lower mortgage rate, and if you have 20 percent, you’ll avoid mortgage insurance, which adds costs to your loan. If you’re a first-time homebuyer and can’t cover a 20 percent down payment, there are loans, grants and programs that can help. The eligibility requirements vary by program, but are often based on factors like your income.
  • Understand your debt-to-income ratio. Your debt-to-income (DTI) ratio compares your total monthly debt payments against your gross monthly income. Not sure how to figure out your DTI ratio? Bankrate has a calculator for that.
  • >Check out different mortgage loan types and terms. A 30-year fixed-rate mortgage is the most common option, but there are shorter terms. Adjustable-rate mortgages have also regained popularity recently.

FAQ

  • It might seem like a bank or lender are dictating mortgage terms, but in fact, mortgage rates are not directly set by any one entity. Instead, mortgage rates grow out of a complicated mix of economic factors. Lenders typically set their rates based on the return they need to make a profit after accounting for risks and costs.

    The Federal Reserve doesn’t directly set mortgage rates, but it does set the overall tone. The closest proxy for mortgage rates is the 10-year Treasury yield. Historically, the typical 30-year mortgage rate was about 2 percentage points higher than the 10-year Treasury yield. In 2023, that “spread” was more like 3 percentage points.
  • Mortgage rates have jumped to 23-year highs, so not many borrowers are opting to refinance their mortgages now. However, if rates come back down, homeowners could start looking to refinance.

    Deciding when to refinance is based on many factors. If rates have fallen since you originally took out your mortgage, refinancing might make sense. A refi can also be a good idea if you’ve improved your credit score and could lock in a lower rate or lower fees. A cash-out refinance can accomplish that as well, plus give you the funds to pay for a home renovation or other expenses.