Mortgage Rates Jump Higher as Home Prices Moderate

Mortgage rates rebounded higher this week, continuing a monthslong trend of volatility in the lending market, according to Freddie Mac. The 30-year fixed rate rose to 5.55%, up significantly from 5.13% a week ago and 2.87% a year ago. The average rate for the 15-year term also jumped meaningfully, from 4.55% last week to 4.85% this week.

The sole exception to this trend was the adjustable-rate mortgage, which carried a slightly lower rate of 4.36% this week. However, interest rates (and by extension, overall borrowing costs) across all mortgage products are much higher this year than they were during the same time last year. Here are the current mortgage interest rates, as of Aug. 25:

30-year fixed: 5.55% with 0.8 point (up from 5.13% a week ago, up from 2.87% a year ago).

15-year fixed: 4.85% with 0.8 point (up from 4.55% a week ago, up from 2.17% a year ago).

5/1-year adjustable: 4.36% with 0.4 point (down from 4.39% a week ago, up from 2.42% a year ago).

[Read: Best Mortgage Lenders.]

“The combination of higher mortgage rates and the slowdown in economic growth is weighing on the housing market. Home sales continue to decline, prices are moderating, and consumer confidence is low. But, amid waning demand, there are still potential homebuyers on the sidelines waiting to jump back into the market.”

— Sam Khater, Freddie Mac’s chief economist, in an Aug. 18 statement

As Khater mentions, economic conditions have had a tangible impact on consumer confidence. And as mentioned in last week’s column, market sentiment has also dwindled among the nation’s housing developers. The National Association of Home Builders recently declared a “housing recession” — but for those who have been waiting for their opportunity to buy a home, it feels more like a housing correction.

While rising mortgage rates may have cooled down a red-hot housing market for sellers, that’s not necessarily bad news for buyers. Home price appreciation has been running at unsustainable levels for the past two years, and this rate of housing inflation has priced many eager buyers out of the real estate market. As home prices begin to moderate, buyers may soon be able to seize a window of affordability that had only been shrinking until now.

[Compare: Mortgage and Refinance Rates in Your Area.]

Indicator of the Week: A New Class of ARM Borrowers

The share of borrowers who choose an adjustable-rate mortgage over a traditional fixed-rate mortgage increased to nearly 11% in May 2022, which is the highest ARM borrowing rate since 2008, according to the Mortgage Bankers Association. Although the market share of ARMs has fallen slightly in the months since then, it’s still the highest it’s been since before the pandemic began.

The surge in ARM demand raised eyebrows among market analysts and served as a foreboding reminder of the housing market crash that fueled the 2008 Great Recession. Heading into that time, lenders were issuing adjustable-rate mortgages to subprime borrowers at low “teaser rates.” When the rate adjustment period began, many of these borrowers were unable to afford the higher monthly payments, resulting in widespread foreclosures.

In the wake of the recession, however, regulators implemented increased consumer protections in the mortgage servicing industry. As a result of the stricter lending requirements, the ARM borrowers of today are in a much better place financially than the subprime borrowers of the late-2000s housing crisis, according to a new report from Zillow.

“Housing market conditions and the profile of ARM borrowers should bring comfort to anybody scarred by the memory of risky lending practices during the Great Recession,” Zillow senior economist Nicole Bachaud says in a news release.

On average, today’s ARM borrowers have higher incomes and more money to go toward a down payment when compared with mortgage borrowers as a whole. ARM borrowers are also purchasing higher-value properties, suggesting they meet the financial requirements to qualify for a larger mortgage amount.

“It’s important not to confuse some added risk for an individual borrower with risk to the housing market as a whole,” Bachaud says. “Borrowers today are more financially prepared for homebuying, and the housing market has a much stronger outlook than the last time ARMs were this popular.”

Overall Borrowers ARM Borrowers
Median Household Income $91,000 $165,000
Median Down Payment Size 10% 23.6%
Median Property Value $325,000 $565,000

That being said, adjustable-rate mortgages still come with the inherent risk that your interest rate — and monthly payment — will rise over time. But if you plan on selling or refinancing your home before the rate adjusts, then you might be able to score a lower mortgage rate with an ARM. The 5/1 hybrid ARM rate was 4.36% for the week of Aug. 25, compared with 5.55% for the 30-year fixed rate.

One percentage point may not seem like much of a difference, but it has the potential to save homebuyers hundreds of dollars on their monthly mortgage payment. And for borrowers with higher incomes and more financial stability, it may be easier to handle higher payments once the rate adjusts.

“While not the best option for every buyer, ARMs can be beneficial for households on solid financial footing that can stomach the possibility of higher payments down the road,” says Bachaud.

More from U.S. News

Mortgage Rates Dip Slightly as Builder Confidence Wanes

Mortgage Rates Bounce Higher as Volatility Continues

Mortgage Rates Dip Below 5% for the First Time Since April

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