What Do High Interest Rates Mean for Homebuyers?

Key Takeaways

• Mortgage rates have climbed above 7% as interest rates have risen, meaning higher monthly payments for would-be buyers and less incentive for sellers to move.
• A growing share of homebuyers are opting for adjustable-rate mortgages, though they are a relatively small portion of the overall mortgage market.
• Analysts expect mortgage rates to remain elevated in the near term.

Rising interest rates are reverberating through the economy. In the housing market, homebuyers are feeling the squeeze as mortgage rates again climb above 7%.

That’s a big deal for affordability. As a percentage of household income, monthly mortgage payments are “quite elevated right now,” says Suryansh Sharma, director of industrials equity research at Morningstar. Higher monthly payments put starter homes out of reach for many households. They also change the calculus around buying versus renting, and keep would-be sellers on the sidelines.

Analysts say those forces will weigh on a stagnant housing market, where inventory and sales are already depressed. “Higher rates make it harder for buyers to afford a home, but at the same time, they make some homeowners less willing to sell because they don’t want to give up the low mortgage rate that they already have,” says Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors.

The average rate on a new 30-year fixed-rate mortgage is now 7.18%, according to Freddie Mac. Rates are lower than their peak of 7.4% last month, but still roughly a full percentage point above average levels at this time last year. Rates peaked at 7.79% in October 2023. Before 2022, they hadn’t crossed the 7% threshold in two decades.

That extra percentage point has made a big difference for homebuyers and the housing market more broadly. When mortgage rates averaged 6.3%, 10.4 million renter households could afford a starter home, says Evangelou. When rates climbed to 7.3%, that number dropped to 8.7 million. At the same time, a 1% increase in mortgage rates can push home prices 10% higher, according to Evangelou.

Why Are Mortgage Rates So High?

Mortgage rates closely track the bond market, especially the 10-year Treasury bond. As interest rates have risen this year—pushed higher by concerns about sticky inflation, rising government deficits, and strong growth fueled in part by the artificial intelligence boom—mortgage rates have risen too.

Some expectations about Federal Reserve monetary policy are also priced into mortgage rates, since the bond market tends to react to potential interest rate cuts or hikes before they happen. Market participants currently expect a 0.25-percentage-point rate hike from the Fed at its December meeting, and one or two additional quarter-point hikes by the end of 2027, according to the CME FedWatch Tool.

NAR’s Evangelou adds that the same forces that have contributed to economic growth and kept housing demand high can also push borrowing costs higher. “A stronger economy is good for jobs and incomes,” she says. “But if that strength keeps inflation and long-term interest rates elevated, it also makes borrowing more expensive.”

The Impact of Higher Mortgage Rates

For many households, “renting homes makes a lot more sense right now, just from a purely financial perspective,” says Morningstar’s Sharma. Beyond boosting monthly payments, higher mortgage rates can weigh on housing turnover and existing home sales, thanks to the “lock-in effect.” Homeowners with lower rates are less likely to move and put their homes on the market, since their new monthly payments could be significantly higher. That makes it even more difficult for prospective buyers to find new homes.

“More than 95% of mortgage borrowers have interest rates below current market rates, and 65% have rates 2pp below market rates, strongly disincentivizing them from moving,” Goldman Sachs economist Ronnie Walker wrote in a report last month. He says the wave of borrowers who refinanced when rates hit rock bottom in 2020 and 2021 has amplified the effect.

Adjustable-Rate Mortgages

Another impact of rising rates has been a slight uptick in adjustable-rate mortgages—loans with lower initial interest rates that reset according to market conditions. For the week ending Nov. 4, adjustable-rate mortgages accounted for 11.4% of total mortgage applications, according to data from the Mortgage Bankers Association. That’s up from 7.9% three months earlier.

“More borrowers are choosing ARMs in this environment to lower their initial payments, with the ARM share at its highest level since September 2025,” said MBA chief economist Mike Fratantoni in a statement.

NAR’s Evangelou says these loans can make more sense for first-time buyers who are more likely to sell or refinance in the short term. But if mortgage rates don’t fall, ARMs carry risk.

Morningstar’s Sharma cautions against reading too much into the uptick in ARM applications. Overall, ARMs are a relatively small share of the mortgage market, not enough to move the needle for the housing market. “There was a sense in the housing market that … adjustable mortgages would pick up substantially,” he says, but that hasn’t happened.

Goldman Sachs’ Walker says that while the growing share of adjustable-rate mortgages could theoretically chip away at the lock-in effect, he expects the impact to be more modest. “[That’s] both because adjustable-rate mortgages are still only a very modest share of outstanding mortgages in the US and because only a modest, though rising, share of those adjustable-rate mortgages will begin to reset in the coming years,” he writes.

Where Are Mortgage Rates Headed?

Homebuyers shouldn’t expect a major drop in mortgage rates in the near term, analysts say. In the short term, interest rates are likely to stay elevated, especially with another Fed rate hike in the cards for December. Inflation remains elevated, and economic growth remains strong.

Things could ease up in the long term. Goldman Sachs strategists expect 30-year fixed mortgage rates to fall to 6.4% by the end of 2027, based on predictions of eventual Fed rate cuts.

Morningstar’s Sharma also expects rates to fall in the long term. But in the meantime, he says things could get worse before they get better: “I don’t think we’ve seen the bottom of the housing market yet.”