What will drive mortgage rates higher in 2022? (Podcast)

Aly J. Yale
Aly J. Yale
The Mortgage Reports Contributor
December 20, 2021 - 4 min read

Mortgage rates are creeping up

Mortgage rates hovered near historic lows this year. It was good news for homeowners, many of whom could refinance to reduce their mortgage payments or tap home equity.

Low rates were a boon for buyers, too, helping many cope with the market’s skyrocketing prices.

But as the year tapered off, rates started to creep up. Now, they’re averaging above 3.10% — up from their low point of 2.65% this year.

What’s causing rates to rise? And will the trend continue in 2022? We spoke with loan officer and mortgage expert Arjun Dhingra to find out.

Listen to Arjun on The Mortgage Reports Podcast!

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What’s driving today’s mortgage rates?

To understand where mortgage rates might go, it’s important to first understand the mechanics behind them — what causes rates to increase or decrease over time.

As Dhingra puts it, “Nobody’s got a crystal ball, that’s for certain. All we can do is follow trends in data to try and understand what drives mortgage rates.”

Those drivers, largely, have to do with the investment market — specifically, mortgage-backed securities and bonds.

MBS and mortgage rates

Put simply, mortgage-backed securities are pools of mortgage loans that are bundled up and then sold off to investors. When those are in high demand, prices on MBS rise, lenders reduce their rates, and mortgages generally get more affordable.

This often happens during economic downturns, because MBS are considered a safe investment.

Thus, MBS were a key driver of the record-low rates seen in 2020 and early 2021.

Bonds and mortgage rates

The same goes for the bond market — and it’s something we’ve seen quite a bit recently.

“Last year, Covid comes into the United States economy, shocks it, and the stock market does a bit of a nosedive,” Dhingra says.

“Investors pull out that money, and then they look for a safer place to put it — someplace not as volatile. Bonds are a place that typically are allocated for such funds. So investors will put their money there, and this ultimately pushes down mortgage rates because the price of bonds goes up.”

Inflation and mortgage rates

Inflation can also impact mortgage rates. Historically speaking, the two are directly correlated; when inflation rises, so do rates.

This has started to happen in recent months as the economy recovers from the pandemic. With inflation rising at a record pace (up 9.6% in November compared to the year before), it seems inevitable mortgage rates and other long-term bond yields will increase as well.

“The slight uptick that we’ve seen in rates over the last quarter or so here in 2021 has been in lockstep conjunction with inflation readings throughout the U.S. economy,” Dhingra says. “It’s safe to say that inflation is here for the foreseeable future heading into 2022, and perhaps even heading into 2023.”

What does that mean for interest rates in 2022?

Dinghra — along with most housing and finance experts — believes rates will continue to rise in 2022. There are a few main reasons for this:

  1. The Federal Reserve has indicated that it will end its mortgage-backed security investments by spring of 2022, which should send rates higher
  2. If inflation continues to rise and the stock market remains volatile (like in the days following recent Omicron headlines), that could cause an uptick in rates as well
  3. Finally, if the Fed decides to hike interest rates sooner and higher than expected, this could send mortgage rates north

As Dhingra puts it, “It’s fair to say that mortgage rates are going to trend a little bit higher into this next year.”

Just how high will mortgage rates go? No one can say for sure. But many expert mortgage rate predictions put 30-year fixed rates in the high-3% or low-4% range by the end of next year.

What higher rates mean for you

Fortunately, mortgage rates shouldn’t get too out of hand in 2022 — at least by historical standards.

“Are [rates] suddenly going to get to a place where they’re going to start hurting affordability in the housing market or spike to uncontrollable levels? I don’t think so,” he says. “As long as wages and salaries continue to go up, that’s going to wash out any hit that we would take from an affordability standpoint.”

Keep in mind: Economic conditions are always in flux, so these are just projections. Get in touch with a mortgage advisor in your area for the latest conditions and to stay on top of rates in your local market.