The average interest rate for a 30-year, fixed-rate mortgage in the U.S. stands at 6.256%, according to mortgage data company Optimal Blue. This rate is down 4 basis points from the previous day but up approximately 2 basis points from a week ago, based on data for home loans locked in as of October 10.
Mortgage rates have remained persistently high, frequently hovering around the 7% mark. Contrary to market expectations, rates did not ease significantly even after the Federal Reserve began reducing the federal funds rate last year. According to Freddie Mac statistics, the average rate for a 30-year fixed mortgage recently surpassed 7% for the first time since last May. This is a substantial increase from the record-low average of 2.65% observed in January 2021, when the government was actively stimulating the economy. Experts now agree that the 2% to 3% rates seen during the pandemic are unlikely to return in the foreseeable future.
Amid a complex economic outlook, with potential policies like tariffs and deportations raising concerns about the labor market and inflation, U.S. homebuyers continue to face high borrowing costs. Some have found ways to manage these costs, such as negotiating rate buydowns with builders of newly constructed homes.
While current rates may seem high, they are not unusual from a historical perspective. The perception of high rates is largely due to the recent memory of the pandemic era’s unprecedented lows. A historical chart from the St. Louis Fed, tracking Freddie Mac data, shows that rates around 7% were common from the 1970s through the 1990s, with a significant spike in the early 1980s when rates exceeded 18%. This context, however, offers little consolation to homeowners with low existing rates who feel unable to move, a situation now commonly known as being in “golden handcuffs.”
Although broad economic conditions are beyond a borrower’s control, an applicant’s financial profile has a substantial impact on the mortgage rate they are offered. To secure the best possible rate, prospective borrowers should:
- Ensure excellent credit. While the minimum credit score for a conventional mortgage is generally 620, a top-tier score of 740 or higher is typically needed for the most competitive rates, which can save tens of thousands of dollars in interest over the loan’s term. FHA loans may be available for those with scores as low as 500-580.
- Maintain a low debt-to-income (DTI) ratio. Lenders prefer a DTI of 36% or below, though some may approve ratios as high as 43%. Your DTI is calculated by dividing your total monthly debt payments by your gross monthly income.
- Get prequalified with multiple lenders. Comparing offers from a mix of large banks, local credit unions, and online lenders is crucial. When comparing estimates, ensure the terms are consistent, noting if one offer includes the upfront cost of purchasing mortgage discount points while another does not.
Several key factors influence mortgage interest rates. The overall health of the U.S. economy is a primary driver; when lenders worry about inflation, they often raise rates. A rising national debt can also push rates higher. Furthermore, demand for home loans matters; lenders might lower rates to attract business in a slow market but raise them when demand is high.
The Federal Reserve also plays a key role. While changes to the federal funds rate often influence mortgage rates, the Fed does not set them directly, and the two do not always move in sync. The central bank’s management of its balance sheet can be even more impactful. In the past, the Fed purchased assets like mortgage-backed securities (MBS) to inject money into the economy and lower rates. More recently, however, the Fed has been shrinking its balance sheet, which tends to push mortgage rates up.
Comparing rates and loan types is essential. While a conventional mortgage might be best for someone with excellent credit, an FHA loan could be a better option for a borrower with a lower score. Shopping around can lead to significant savings. Research from Freddie Mac indicates that in a high-interest-rate market, homebuyers who apply with multiple lenders can save between $600 and $1,200 annually.
