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Mortgage rates spike as concerns about inflation persist

The 30-year fixed-rate average rebounded to 5.51 percent this week

After the biggest one-week decline since 2008, the 30-year fixed-rate average headed higher, reaching 5.51 percent. (Hannah Agosta for The Washington POst)
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After the biggest one-week decline since 2008, mortgage rates headed back up.

According to data released Thursday by Freddie Mac, the 30-year fixed-rate average jumped to 5.51 percent with an average 0.8 point. (A point is a fee paid to a lender equal to 1 percent of the loan amount. It is in addition to the interest rate.) It was 5.3 percent a week ago and 2.88 percent a year ago.

Freddie Mac, the federally chartered mortgage investor, aggregates rates from around 80 lenders across the country to come up with weekly national averages. The survey is based on home purchase mortgages. Rates for refinances may be different. The survey uses rates for high-quality borrowers with strong credit scores and large down payments. Because of the criteria, these rates are not available to every borrower.

The 15-year fixed-rate average climbed to 4.67 percent with an average 0.8 point. It was 4.45 percent a week ago and 2.22 percent a year ago. The five-year adjustable rate average rose to 4.35 percent with an average 0.2 point. It was 4.19 percent a week ago and 2.47 percent a year ago.

Calculate how much more mortgages will cost as interest rates rise

“Mortgage rates are ramping up again because inflation is higher than investors had expected,” said Holden Lewis, a home and mortgage expert at NerdWallet. “Your mortgage rate is the price of borrowing money, and the price of money goes up when inflation is high.”

A report this week revealed little progress in the fight against inflation. The consumer price index rose 9.1 percent year-over-year, climbing at its fastest pace in four decades.

Inflation continued torrid rise in June

With June’s inflation reading surpassing May’s, investors are wondering whether the Federal Reserve will consider raising its benchmark rate by 100 basis points, rather than 75 basis points as it did in June. (A basis point is 0.01 percentage point.) Canada recently increased interest rates by one percentage point, the largest increase since 1998. The Fed’s rate-setting committee meets this month.

“Inflation is in beast-mode, hitting a high not seen since 1981,” said Elizabeth Rose, a sales manager at Mortgage300. “We are all feeling it in our wallet. This move higher will likely pressure the Fed to hike another 75 basis points, and Fed futures are indicating nearly a 50-50 chance of a 100-basis-point hike.”

When investors are worried about inflation, their appetite for buying bonds diminishes because the return on their investment is less when inflation is high. Inflation erodes the value of a bond’s future payments. Less demand causes bond prices to drop and yields to rise. Since mortgage rates tend to follow the same path as the 10-year Treasury yield, they rise, too.

But investors also are worried about a recession. In a recession, bonds are seen as a safe investment. More demand for bonds causes prices to rise and yields to fall, which usually sends mortgage rates lower.

“Higher-than-previous and higher-than-expected CPI indicates that inflation is not under control,” said Dick Lepre, loan agent at CrossCountry Mortgage. “Another Fed hike is a certainty even as we enter a recession.”

Stubborn prices drastically increase recession chances, which puts out a weekly mortgage rate trend index, found half the experts it surveyed expect rates to go down in the coming week.

“Inflation hits a fresh 40-year high and forces the Fed to remain aggressive on interest rates,” said Greg McBride, the chief financial analyst at “But front-loading the rate hikes could actually be better for mortgage rates as it moves up the timetable for when inflation and interest rates peak.”

Meanwhile, mortgage applications were lower last week. The market composite index — a measure of total loan application volume — decreased 1.7 percent from a week earlier, according to Mortgage Bankers Association data.

Refinances picked up as rates moved lower, but they weren’t enough to offset a decline in purchase applications. The refinance index rose 2 percent from the previous week but was 80 percent lower than a year ago. The purchase index fell 4 percent. The refinance share of mortgage activity accounted for 30.8 percent of applications.

After reaching a record $460,000 in March, the average purchase loan size fell to $415,000 last week.

“Mortgage applications decreased during the first full week of July, as higher mortgage rates continue to be a drag on borrower demand for refinances and home purchases,” Bob Broeksmit, MBA’s president and chief executive, wrote in an email. “Inflationary pressures and declining affordability conditions have forced some prospective buyers to delay their home search this summer; however, the labor market is still strong, housing inventory is rising, and home prices and mortgage rates are moderating. Demand could increase in the coming months if these trends continue.”

The MBA also released its mortgage credit availability index (MCAI), which showed that credit availability decreased in June. The MCAI slid 0.3 percent to 119.6 last month. A decrease in the MCAI indicates lending standards are tightening, while an increase signals they are loosening.

“Significantly higher mortgage rates compared to a year ago slowed refinance and purchase activity and impacted the overall mortgage credit landscape,” Joel Kan, an MBA economist, said in a statement. “Credit availability was mixed by loan type, with the conventional index up 1.2 percent and the government index down 1.7 percent. … With higher rates and elevated home prices, more prospective buyers are applying for ARMs, but activity remains below historical averages.”