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Average 30-year fixed mortgage rates fell nearly 50 basis points last week, and rates remain low today.
The next move in rates largely depends on inflation. In October, price growth showed signs that it was beginning to return to a more sustainable level. But with only a month of promising inflation data, it’s hard to predict exactly where rates will go in the months and years ahead.
Based on current conditions, there are a few possible outcomes we could see regarding mortgage rates in 2023.
The first is that inflation continues to decline, the Federal Reserve is able to slow its pace of raising the fed funds rate, and mortgage rates slowly decline throughout the year.
The second possible scenario is that the tightening of the Federal Reserve pushes the US economy into recession. In this case, mortgage rates would likely decline faster, but this would be at the expense of a healthy economy.
Many experts believe this is the most likely scenario. In its August commentary, the Mortgage Bankers Association said it estimated there was a 50% chance the economy would experience a mild recession over the next 12 months. Others believe that it is not a question of if there will be a recession, but when.
The third possible outcome is that inflation begins to rise again and the Fed must return to aggressive rate hikes in an attempt to tame it. This would likely push mortgage rates past 7% and significantly increase the risk of a recession in 2023.
Mortgage rates today
| Type of mortgage | Average rate today |
Mortgage refinance rates today
| Type of mortgage | Average rate today |
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Use our free mortgage calculator to see how today’s mortgage rates will affect your monthly and long-term payments.
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$1,161
Your estimated monthly payment
- pay one 25% a higher down payment would save you $8,916.08 on interest charges
- Lower the interest rate by 1% would save you $51,562.03
- Pay an extra fee $500 each month would reduce the term of the loan by 146 month
By plugging in different terms and interest rates, you’ll see how your monthly payment might change.
Projection of mortgage rates for 2023
Mortgage rates started to recover from historic lows in the second half of 2021 and have risen more than three percentage points so far in 2022. They will likely remain near current levels for the remainder of 2022.
But many forecasts predict that rates will start falling next year. In their latest forecast, Fannie Mae researchers predicted that rates are currently peaking and that 30-year fixed rates will drop to 6.2% by the end of 2023.
The fall in mortgage rates in 2023 will depend on the Federal Reserve’s ability to control inflation.
Over the past 12 months, the consumer price index has increased by 7.7%. This is a slowdown from the previous month’s numbers, meaning the Fed could start to slow its pace of raising the fed funds rate.
As inflation slows, mortgage rates will likely start to come down as well. If the Fed acts too aggressively and engineer a recession, mortgage rates could fall further than currently forecast. But rates are unlikely to fall to the historic lows that borrowers have enjoyed over the past two years.
When will real estate prices go down?
House prices are starting to drop, but we probably won’t see huge drops, even in a recession.
The S&P Case-Shiller Home Price Index shows prices are still up year-over-year, although they fell on a monthly basis in July and August. Fannie Mae researchers expect prices to fall 1.5% in 2023, while the MBA expects prices to rise 2.8% in 2023 and 2.1% in 2024.
Skyrocketing mortgage rates have pushed many promising buyers out of the market, slowing demand for home purchases and putting downward pressure on home prices. But rates could start falling next year, taking some of that pressure off. The current supply of homes is also historically low, which will likely prevent prices from falling too far.
Advantages and Disadvantages of Fixed and Variable Rate Mortgages
Fixed rate mortgages lock in your rate for the life of your loan. Variable rate mortgages lock in your rate for the first few years, then your rate increases or decreases periodically.
ARMs typically start out with lower rates than fixed rate mortgages, but ARM rates can increase after your initial introductory period is over. If you plan to move or refinance before the rate adjusts, an ARM could be a good deal. But keep in mind that a change in circumstances could prevent you from doing these things, so it’s a good idea to consider whether your budget could support a higher monthly payment.
Fixed rate mortgages are a good choice for borrowers looking for stability, as your monthly principal and interest payments won’t change for the life of the loan (although your mortgage payment may increase if your taxes or insurance increases).
But in exchange for this stability, you will take a higher rate. It may seem like a bad deal right now, but if rates go up again in a few years, you might be happy to have a locked-in rate. And if rates tend to drop, you may be able to refinance for a lower rate.
How does an adjustable rate mortgage work?
ARMs begin with an introductory period where your rate will remain fixed for a certain period of time. Once this period has elapsed, it will begin to adjust periodically – usually once a year or once every six months.
How much your rate changes depends on the index used by the ARM and the margin set by the lender. Lenders choose the index used by their ARMs, and this rate can move up or down depending on current market conditions.
Margin is the amount of interest a lender charges on top of the index. You should shop around with several lenders to see which offers the lowest margin.
ARMs also come with limits on how much modification they can make and how high they can go. For example, an ARM can be limited to a 2% increase or decrease each time it adjusts, with a maximum rate of 8%.
Should I get a HELOC? Advantages and disadvantages
If you’re looking to tap into the equity in your home, a HELOC might be the best way to do it right now. Unlike a cash-out refinance, you won’t have to get a new mortgage with a new interest rate, and you’ll likely get a better rate than with a home equity loan.
But HELOCs don’t always make sense. It is important to consider the pros and cons.
HELOC Benefits
- Only pay interest on what you borrow
- They usually have lower rates than alternatives, including home equity loans, personal loans and credit cards
- If you have a lot of equity, you could potentially borrow more than you could get with a personal loan.
Against HELOC
- Rates are variable, which means your monthly payments could go up
- Withdrawing equity from your home can be risky if the value of the property drops or you fail to repay the loan
- The minimum withdrawal amount may be more than you wish to borrow
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