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The average rate on the most popular US home loan climbed sharply last week, reaching its highest level in more than two years. The increase followed a Federal Reserve rate hike and another rise in Treasury yields tied to higher oil prices.

The average 30 year fixed mortgage rate jumped 15 basis points to 7.12% during the week ended September 18, according to the Mortgage Bankers Association. The organization released the figures on Wednesday.

The rate was last higher in May 2024. Its latest increase added pressure to prospective homebuyers already contending with residential borrowing costs that have risen substantially since late February.

Mortgage rates have increased by more than a full percentage point since joint strikes by the US and Israel against Iran began pushing up global oil prices in late February. That increase has squeezed would be buyers and chilled the US housing market.

The sharp mortgage rate movement reflects developments beyond the housing sector. Residential borrowing rates track US Treasury yields, which have been responding to oil prices and the inflation threat associated with higher energy costs.

Inflation has remained above the Federal Reserve’s 2% goal for five and a half years. Persistent price pressure led the central bank to increase its short term policy rate last week.

The Fed raised that rate by a quarter of a percentage point, placing it in a range between 3.75% and 4.00%. The move was intended to put inflation on a “timelier” path toward the central bank’s 2% objective.

The increase may not be the final rate move this year. Nearly all Fed policymakers projected at least one additional rate increase by the end of the year, while traders are also betting on further hikes.

Those expectations matter for borrowers because mortgage rates are linked to Treasury yields rather than being set directly by the Fed’s policy rate. Rising oil prices have lifted those yields as markets weigh the possible inflationary consequences.

The result has been a fresh setback for mortgage demand. The MBA said the rise in rates last week produced declines in both refinancing applications and applications to purchase homes.

Borrowers also shifted toward adjustable rate mortgages, which carry lower upfront borrowing costs than fixed rate mortgages. These loans reset after a specified number of years to the rate prevailing at that time.

Adjustable rate mortgages accounted for 9.8% of all mortgage applications last week, the MBA reported. Their growing share came as the average rate on a 30 year fixed mortgage moved beyond 7%.

The shift illustrates the choices facing applicants as fixed borrowing costs rise. Some borrowers accepted the future reset structure of adjustable rate loans in exchange for lower upfront costs, according to the application trends described by the MBA.

The pressure has developed rapidly since late February, with global oil prices, Treasury yields and inflation concerns feeding into residential borrowing rates. Over that period, mortgage rates have climbed more than one percentage point and home purchase activity has weakened.

Refinancing activity also fell after last week’s 15 basis point increase. Higher rates reduce the appeal of replacing an existing mortgage when the available fixed rate has reached its highest point in more than two years.

With Fed policymakers projecting another possible increase and traders betting on additional hikes, mortgage borrowers remain exposed to changing Treasury yields. For the housing market, the move to 7.12% represents another escalation in the financing squeeze confronting prospective buyers.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.