The average rate on a 30-year mortgage in the United States fell to its lowest level in two years this week, boosting the purchasing power of home buyers as they navigate a housing market where prices are near record highs.
The interest rate rose to 6.08% from 6.09% last week, mortgage buyer Freddie Mac said Thursday. A year ago, the rate averaged 7.31%.
The last time the average rate was lower was on September 15, 2022, when it was 6.02%.
Borrowing costs on 15-year fixed-rate mortgages, popular among homeowners looking to refinance their home loans at a lower rate, rose slightly this week. The average rate rose to 5.16% from 5.15% last week. A year ago, it averaged 6.72%, Freddie Mac said.
Mortgage rates are influenced by several factors, including how the bond market reacts to the Federal Reserve’s interest rate decisions. That can change the trajectory of the 10-year Treasury yield, which lenders use as a guide to price home loans.
The average 30-year mortgage rate is down from 7.22% in May, its highest since the beginning of the year. Rates have been falling since July, in anticipation of the Fed’s decision last week to cut its key interest rate for the first time in more than four years.
Fed officials have also indicated they expect further cuts this year and in 2025 and 2026. The rate cuts should, over time, lead to lower borrowing costs on mortgages.
The average rate on a 30-year mortgage rose from less than 3% in September 2021 to 7.8% last October, its highest level in 23 years. The increase coincided with the Fed raising its benchmark interest rate to combat inflation.
When mortgage rates rise, they can add hundreds of dollars a month to borrowers’ costs. The housing market has seen a decline in sales since 2022 as high mortgage rates have discouraged many potential buyers. Sales of occupied U.S. homes fell in August, even as mortgage rates began to decline.
However, as rates have become more attractive in recent weeks, more homeowners have applied for home loans.
Mortgage applications jumped 11% last week, according to the Mortgage Bankers Association. The surge was driven in part by a 20% increase in applications to refinance existing mortgages at a lower rate.
“Given the downward trajectory of rates, refinancing activity continues to pick up, allowing many homeowners to lower their monthly mortgage payments,” said Sam Khater, Freddie Mac’s chief economist. “Meanwhile, many homebuyers are waiting to see if rates fall further as more economic data is released in the coming weeks.”
While lower interest rates give home buyers more purchasing power, a mortgage of about 6% is still not low enough for many Americans struggling to afford a home. That’s largely because home prices have climbed 49% over the past five years, about double the rate of wage growth. They remain near their all-time highs, supported by a housing shortage in many markets.
Mortgage rates would have to return to levels close to their lows of three years ago, or housing prices would have to fall dramatically for many buyers to be able to afford a home. Neither scenario is likely to happen in the near future.
Economists generally expect mortgage rates to remain near current levels, at least this year. Fannie Mae expects the rate on a 30-year mortgage to average 6.2% in the October-December quarter and fall to an average of 5.7% in the same quarter next year. It averaged 7.3% in the same period in 2023.
