Mortgage Rates Forecast for 2023: Will Mortgage Rates Go Down?

One of the most significant factors that have impacted the housing market in 2022 is the rising mortgage rates. However, the mortgage interest rates forecast by many experts suggest this trend might not continue in 2023.

They’re hopeful because they believe the economy heated-up during 2022 and that the Federal Reserve will cool it down in the upcoming period. While the Federal Reserve doesn’t set mortgage rates, it changes federal funds rates, affecting short-term loan borrowing expenses. In turn, these can influence 10-year bond yields, often the basis for calculating mortgage rates.

Mortgage Rates Forecast for 2023

To answer “Will interest rates go down in 2023?” and provide other interest rate predictions, let’s first look at 2022 numbers. Mortgage rates nearly doubled from their 2021 levels.

This increase in rates has caused a decrease in homebuyers’ chances of purchasing new properties. Coupled with high inflation and rising house prices, it made the market inaccessible to many people. However, the outlook seems slightly better in 2023. The best news for homebuyers is that the average mortgage rate should reduce next year. Many institutions forecast that the rates in 2023 may end at approximately 5.4% – a sharp decline from the current level. Breaking into a market will be much easier if these predictions come true.

Based on experts’ analyses, the interest rate for a 30-year fixed mortgage loan may move from 5% to 6.5% in 2023.

The decrease might only occur after potential fluctuations at the beginning of 2023. Namely, experts anticipate a lot of volatility in Q1 of the following year because the Federal Reserve will probably look to increase the rates in January and February.

The Federal Reserve might base this decision on its efforts to curb inflation. While this may help the economy in the long run, the Fed’s efforts may slow down the demand for housing and mortgages at the start of 2023.

Several other factors may also help increase mortgage rates in Q1 2023. For instance, economists expect mortgage origination volume to decline by $200 billion in 2023. Consequently, there may be fewer mortgage applications at the beginning of 2023. They also predict that refinance volume will drop by nearly 25%.

On the flip side, the rising mortgage rates and slower housing activity are likely to reduce the growth of house prices. Many experts anticipate property prices will flatten out sometime in 2023, and the trend might continue through 2024. This should give families with lower household incomes more time to catch up to higher property prices. The prices in some local markets may drop dramatically, even if the national average remains largely unchanged.

Furthermore, many aspects have signaled that mortgage rates are nearing their peak, including the lower Treasury yields that help establish mortgage rates. If the drop persists, it could make the rates go down by more than 2% in Q2 or Q3 of 2023.

Another factor you need to consider when discussing mortgage rate predictions for the next 5 years and 2023, in particular, is inflation. Inflation is one of the main reasons the rates have doubled since the beginning of 2022. But when it cooled down in October, the rates plummeted. This begs two questions: “Are mortgage rates going down, and have they peaked?”

Lowering inflation may be the light at the end of the tunnel, but experts aren’t too optimistic. One or two months of lower inflation is excellent, but the Federal Reserve primarily cares about cumulative effects across longer periods. Therefore, inflation will need to reduce for a few consecutive months in 2023. If that happens, mortgage rates are more likely to stabilize and go down. This can ease the affordability crisis and allow you to buy a home without being heavily indebted.

A Simple Example

To gain a better understanding of the unfavorable economic landscape for homebuyers in 2022, suppose you took out a $150,000 loan at the start of the year. Your interest rate was around 4.5%, and the bank approved a 30-year deal. In this case, your monthly payments would be $760.30, resulting in $123,610 of total interest paid during those 30 years.

By contrast, say you didn’t want to apply for a mortgage at the beginning of the year but decided to postpone your application for November. The amount borrowed is the same ($150,000), and your interest rate would now be 6.5%. This means your monthly payments would be $948, and the total interest you’d need to cover would be $191,316.

Even though the principal is the same in both cases, you owe the bank nearly $70,000 more in the second case due to a higher interest. It increases monthly payments, raising the total amount you need to return.

As for taking out a loan in Q4 2022, many people would have done the same. The interest rate at the start of the year seemed too high, so you expected it to drop by the end of the year. Still, it kept rising and reached some of the highest levels in recent years.

Hence, taking out a fixed 30-year mortgage loan in Q1 2022 would have been a much better decision. Even an adjustable-rate mortgage (ARM) would have been more affordable because the interest rate wouldn’t have been so high from the outset.

How Will Interest Rates Affect the Housing Market?

A crucial element of any mortgage interest rate forecast for 2023 is how the interest rates will influence the housing market. When making these predictions, it’s vital to analyze how the numbers will affect all parts of the housing market. For instance, if the interest rate remains high due to federal funds and other factors, the housing cost will go up. In that case, you’ll need to make higher monthly payments for loans with the same principal.

Last year, a $250K mortgage cost $1,195 per month at a 4% interest rate. But if the interest rate remains in the 6.5%-7% range in Q1 2022, your monthly payments will rise to more than $1,500, increasing the total amount you need to pay back. The effect compounds if you’re considering a larger loan. This means mortgage interest rates will determine your purchasing power in 2023. If they stay at approximately 6%, you’ll have 25% less spending power than you did in 2021.

As the rates rise, you’re less likely to buy an expensive house. This can also be good news for you because it kills demand and lowers property prices.

In addition to buyers, sellers should also pay attention to mortgage interest rates in 2023. They’re also impacted but in different ways. For example, suppose you wanted to sell your home for $400,000. You list your house at $400K, expecting to make a large profit. But the rising interest rates in Q4 2022 (and potentially Q1 2023) only allow potential homebuyers to afford your property if it’s priced at around $350,000. You can profit from the sales, but even a slight mortgage rate increase (around 1%) reduces the value of your home by about $50,000. Your experience and ability to use market conditions will be to your advantage.

Speaking of property values, they will remain closely correlated to mortgage interest rates, impacting sellers and buyers. The condition of the economy is a crucial consideration that affects both groups. If it grows quickly enough, the potentially rising rates won’t be as significant for housing prices and property values. For instance, even if higher mortgage rates increase monthly payments by $300-400, a robust economy lets employers raise salaries. In turn, the uptick in the interest rate is virtually neutralized.

An economy that keeps developing jobs and raises wages is less likely to cripple property values and the housing market in 2023.

Finally, real estate professionals are a rare group that can benefit from the likely rise in interest rates in Q1 2023. As the rates rise, you can expect a positive effect on real estate. More people may look for rental properties because they’re not eligible for mortgages. That said, increasing rates also lower prices, so purchasing might sometimes make more sense than renting a property. Additionally, rising interest rates may reduce the number of real estate transfers due to tighter lending standards. That’s why more customers might look for rental houses before they can afford mortgages.

All these factors may deliver major windfalls for realtors.

Is It a Good Time to Refinance My Home?

Refinance rates skyrocketed in 2022, so consider postponing your refinance plan. Plus, the uncertain mortgage rate predictions further increase the risk of refinancing a mortgage loan. For instance, suppose you took out a mortgage loan with 5% interest, and there are 26 years left on your plan. You want to refinance the rate to 4%, but for three decades, you may need to pay over $10,000 in interest.

On top of that, the closing costs on the new loan might not outweigh the potential savings gained from reduced monthly payments. Refinancing a 30-year loan incurs third-party appraisal fees, origination fees, and other closing expenses.

Since refinancing doesn’t sound too good, you can consider a few alternatives. A home equity line of credit (HELOC) is one of your options. It provides a source of funds in various circumstances, such as when you anticipate significant expenses but are strapped for cash. Qualifying for a HELOC might be hard today, but if you’re eligible, here are the benefits you can gain from your plan:

  • Lower interest rates – Although mortgage interest rates are likely to increase in Q1 2023, HELOCs should still have lower rates and lower initial costs. This makes them a great choice for many ongoing projects or debt consolidation.
  • Tax-deductible interest – Many institutions allow you to deduct the interest paid on your HELOC if you finance your home improvements with the funds.
  • Flexibility – Another great thing about a HELOC is that it lets you use your money when you need it. Unlike personal loans that require lump sums, HELOCs can be used in bursts.

If you can’t refinance in the current economic climate or are not eligible, try to improve your chances and reapply in 6-9 months. The market rates might change, but enhancing your credit score can ensure you get favorable rates at any point in 2023. To do so, improving your debt-to-income ratio should be your top priority. The number indicates total debt in relation to total gross income. Try to get it as close to 36% as possible to improve your refinancing offers.

Make an Informed Mortgage Decision

The last thing you want is to take out a mortgage in 2023 without considering any mortgage interest rate forecast. According to the data, the rate will likely rise slightly in Q1, but it should flatten out and decrease in subsequent quarters. So, it might be wise to wait for the other half of 2023 to consider your mortgage options. Besides lower interest rates, you may also benefit from a better economy overall in this period if the Federal Reserve can contain the inflation.

Matthew Levy Matthew Levy Last update:
Matthew is a freelance financial copywriter with 10+ years in financial services. He holds a Bachelor of Science degree in Economics with business and finance options and is a CFA Charterholder. He is from Vancouver, Canada, but writes from all over the world.