US mortgage rates have climbed to their highest level in nearly three years, making it more expensive for Americans to buy homes. The average rate on the most common 30-year fixed-rate mortgage rose 19 basis points to 7.49% in the week ended October 2, according to the Mortgage Bankers Association (MBA).
The 7.49% rate is the highest since November 2023. The sharp rise is putting more pressure on homebuyers, who now face higher monthly loan payments when purchasing a house. The rise comes just weeks before the November 3 US elections. The elections will decide whether President Donald Trump's Republican Party can keep control of Congress, Reuters reported.
Why US mortgage rates are rising
A major reason mortgage rates are going up is that US Treasury yields are rising. Mortgage rates are closely linked to the 10-year US Treasury yield. That yield crossed 5.3% on Monday, reaching its highest level in about 24 years. When Treasury yields rise, mortgage rates usually rise too.
Investors are also worried that inflation may stay high because oil prices are rising. Higher oil prices can make fuel, transport and other goods more expensive. This can push inflation higher.
{{/usCountry}}Investors are also worried that inflation may stay high because oil prices are rising. Higher oil prices can make fuel, transport and other goods more expensive. This can push inflation higher.
{{/usCountry}}At the same time, the US economy is growing faster than expected. This is also pushing Treasury yields higher. Investors are now looking at how strong the economy is and what this could mean for interest rates.
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Mortgage rates rise 1.4 percentage points
Mortgage rates have risen by about 1.4 percentage points since late February. The increase has happened since joint US-Israeli strikes against Iran began in late February, while the 10-year Treasury yield has also risen by a similar amount, Reuters reported.
Inflation remains another major concern for the US economy. Inflation stood at 3.4% in August, according to the measure targeted by the Federal Reserve. That is well above the Federal Reserve's 2% inflation target. Higher inflation makes it harder for the Fed to lower interest rates and can keep borrowing costs elevated.
Fed rate hike could keep loans costly
The Federal Reserve could raise interest rates again before the end of the year. Fed policymakers have indicated that they expect to follow their September rate increase with another hike by year-end. Markets, however, currently expect the Fed to leave rates unchanged at its next meeting. Investors are betting that policymakers will not make another move at the Fed's meeting at the end of October.
US mortgage applications fall
Higher mortgage rates are already hurting demand for home loans. Mortgage loan applications fell 4.2% last week from the previous week, the MBA said. Refinancing activity also dropped sharply. At current mortgage rates, homeowners who already have cheaper loans have little reason to refinance into a much more expensive loan, according to Reuters.
Homebuyers pull back
Potential homebuyers are also stepping back from the housing market. Higher borrowing costs mean buyers may have to pay more every month for the same amount of home financing.
Joel Kan, the MBA's deputy chief economist, said very few homeowners have a reason to refinance at current rates. He also said the jump in borrowing costs has caused many potential buyers to pull back from the purchase market, as cited by Reuters.
Higher rates hurt home affordability
The mortgage-rate rise is adding to concerns about housing affordability in the US. Americans are already dealing with a high cost of living, making more expensive home loans an additional financial burden.
The cost of living is the biggest issue for many Americans ahead of the November 3 election. A Reuters/Ipsos poll completed on Monday found that the issue is at the top of voters' concerns. The economic pressure is also coming at a difficult time for President Trump. His approval rating stood at 32% in the Reuters/Ipsos poll, a record low among Hispanic voters, according to Reuters.
In simple terms, US home loans are getting costlier because several pressures are moving in the same direction: higher Treasury yields, concerns about inflation, rising oil prices and expectations of another Fed rate hike are all keeping borrowing costs elevated.
For homebuyers, the immediate result is higher monthly mortgage costs and weaker affordability. For existing homeowners, high rates make refinancing less attractive, while for the wider housing market, expensive loans are causing some buyers to delay purchases.