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Mortgage rates hit highest level since May 2020

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Mortgage rates soared to their highest level in more than a year and a half as expectations for a higher interest-rate environment hardened after details of the Federal Reserve's last meeting were released this week.

The rate on the 30-year fixed mortgage — the most common home loan for homebuyers — jumped from 3.11% to 3.22% this week, the highest level since May 2020, according to Freddie Mac. The rate is more than a half-point higher than the 2.65% from a year ago, which also marked the all-time low for the rate.

"The strong advance followed the jump in the 10-year Treasury to the highest level since March 2021, following the release of the Federal Reserve’s December meeting minutes, which indicated the central bank is preparing to initiate balance sheet reduction measures quickly in the months ahead," said George Ratiu, Realtor.com's manager of economic research.

A house on sale is seen in Washington D.C., the United States on Dec. 12, 2021. U.S. annual home price growth remained strong at 18 percent in October, the highest recorded in the 45-year history of the index, according to CoreLogic's Home Price Index. (Photo by Ting Shen/Xinhua via Getty Images)
A house on sale is seen in Washington D.C., the United States on Dec. 12, 2021. U.S. annual home price growth remained strong at 18 percent in October, the highest recorded in the 45-year history of the index, according to CoreLogic's Home Price Index. (Photo by Ting Shen/Xinhua via Getty Images)

Fixed mortgage rates tend to follow the movement of the 10-year Treasury yield, which jumped on Wednesday after the Fed minutes showed that the central bank is ready to make moves to curb inflation that has accelerated more than anticipated.

The effect of higher mortgage rates already hit the refinance market, according to Joel Kan, the associate vice president of economic and industry forecasting at the Mortgage Bankers Association.

"Refinance demand continues to dwindle, as many borrowers refinanced in 2020, and in early 2021 — when mortgage rates were around 40 basis point lower," he said in a statement.

Refinance activity decreased 2% last week and was 40% lower than a year ago, the MBA found. The volume of mortgage applications for purchases also dropped 4% and was 12% lower than a week ago.

With higher rates, homebuyers face yet another headwind in the housing market. Housing inventory is still low in 2022, which is propping up high prices. Add in fast-paced inflation and buyers are seeing their budgets shrink.

(Credit: Freddie Mac)
(Credit: Freddie Mac)

"At today’s rate, a buyer of a median-priced home is paying over $200 more on their monthly mortgage payment, adding over $2,400 per year to their housing costs," Ratiu said.

Even higher rates are likely on the way, according to Sam Khater, chief economist at Freddie Mac.

"With higher inflation, promising economic growth and a tight labor market, we expect rates will continue to rise," Khater said in a statement.

There are some potential silver linings, Ratiu said. The Omicron variant, if proven milder, could help bring an end to the pandemic this year, especially after winter passes. That would boost consumer spending and perhaps prompt some homeowners to finally list their homes for sale, helping to alleviate some of the inventory issues. Robust new construction should also add to the supply.

"The combined effect of these factors would translate into more homes at better prices for many buyers in 2022," Ratiu said.

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Janna is the personal finance editor for Yahoo Finance. Follow her on Twitter @JannaHerron.

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