How Rising Inflation Rates Can Affect Your Mortgage

As inflation rises, the cost of everything goes up, including real estate. However, if you can lock in a low-interest, fixed-rate mortgage, then the cost of your home — an appreciating asset — will stay the same as the value of your property increases.

For those who already have a mortgage and might be worried about the effect of inflation, the time to refinance is now. There is a strong likelihood that rates will rise, not fall in the upcoming year.

With mortgage rates coming off rock-bottom levels — the average 30-year fixed mortgage interest rate was 3.24% the last week of the year — an uptick in rates is unlikely to slow the fiercely competitive U.S. housing market.

This means new homebuyers might have less buying power. It also means homeowners who’ve been considering refinancing shouldn’t miss their chance to lock in a low rate.

Real Money contributor Ed Ponsi says we’re sandwiched between inflation and other economic concerns, and the pandemic’s turn for the worse. But he’s got a sweet stock to buy and hold for the new year, with charts and a delicious reason why. Read more about it and get more investing ideas on Real Money.

“Elevated inflation, coupled with a less accommodative Federal Reserve in 2022, are both indicative of higher, rather than lower mortgage rates. Homeowners that haven’t yet refinanced should do so now as any increase in rates next year could erode potential savings,” says Greg McBride, senior vice president and chief financial analyst at

But for home buyers, McBride says, “the lack of homes available for sale and the price tag on those that are, will continue to be the major obstacles. Mortgage rates will still be at very attractive levels next year so no need to worry excessively about that,” he says.

Read: The Organization for Economic Cooperation and Development, now expects price inflation to average 4.4% in 2022, up from the 3.1% predicted in September’s forecast.

The Mortgage Bankers Association is forecasting that the average 30-year fixed mortgage rate will hit 3.7% by the third quarter of 2022 and 4% by the end of 2022. That would be a big increase from the current rate and is well above the 3.4% rate that Fannie Mae projects by the end of 2022.

U.S. inflation accelerated to the fastest pace in four decades last month, according to the Bureau of Labor Statistics, as surging energy, rent and used car costs add pressure to consumer prices. This cements high inflation as a hallmark of the pandemic recovery and eroding spending power even as wages increase.

More in our inflation series:

Mortgage interest rates have a significant impact on the overall long-term cost of purchasing a home through financing. Mortgage rates have hovered near all-time lows for much of this year, even as inflation has increased sharply across much of the economy.

While the financial health of borrowers affects the interest rate they will be offered on a loan, economic factors and government monetary policy affect the entire mortgage rate process.

The Federal Reserve helps regulate inflation by raising, maintaining, or lowering interest rates, which has a powerful effect on the overall economy. Their actions impact everything from borrowing costs in the real estate market to bond yields to the prices of raw material goods, like commodities.

Ultimately, inflation could allow borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers.

Inflation has historically been lower than the average rate on a 30-year mortgage. But since April, inflation has been above the average long-term mortgage rate. The last time inflation ran higher than the average rate on a 30-year home loan was August 1980, according to the Federal Reserve.

How to Get the Best Mortgage Rate

Even in the face of inflation, there are steps you can take to get the best mortgage rate. Following these steps to get the best mortgage interest rate can save you real money, especially over the long run. These tips can help you whether you’re buying a home or refinancing.

Work on your credit score. If your score is below 760, it’s worth the effort to improve your credit score by taking steps to pay down your balances and make all your payments on time. Having excellent credit will make you eligible for the lowest mortgage interest rates.

Decrease your debt. This one step can help you get the best mortgage rate in two ways. It decreases your debt to income ratio which lenders consider in the loan approval process and it will also improve your credit score.

Apply with at least three lenders. Thousands of mortgage lenders are competing for your business. So another way to make sure you get the best mortgage rate is to apply with at least three lenders and see which offers you the lowest rate. Lenders are required to give you a loan estimate. This document will show you the loan’s interest rate and closing costs, along with other key details such as how much the loan will cost you in the first five years. Use this to see which lender is offering the best rate and overall deal.


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