Mortgage rates hit 6.55%, highest in nearly a year on oil surge

The average rate on a 30-year fixed mortgage rose to 6.55% this week, the highest level in nearly a year, as surging oil prices and renewed inflation concerns pushed borrowing costs higher across the housing market.

"The combination of elevated oil prices and sticky inflation expectations is keeping upward pressure on mortgage rates, even as the broader economy shows signs of cooling," said James Okafor, rates analyst at Edgen. "The 10-year Treasury yield has risen roughly 60 basis points since late February, and mortgage rates are following that trajectory."

Freddie Mac's weekly survey showed the 30-year fixed rate climbing from 6.49% last week, while the 15-year fixed rate rose to 5.93% from 5.82%. One year ago, the 30-year averaged 6.75%. The current reading is the highest since Aug. 28, when the rate stood at 6.56%, and marks a sharp reversal from late February, when the average briefly dipped below 6% for the first time since 2022.

The rise in mortgage rates is tightening a housing market already constrained by elevated home prices and limited supply. Mortgage applications fell 2.7% last week from the prior week, driven by a 7% drop in purchase applications, according to the Mortgage Bankers Association. Pending home sales declined 5.4% in June from the prior month, the National Association of Realtors reported Thursday, signaling further softening in the summer selling season.

Oil's Spillover Into Housing

The primary driver behind the rate increase is the surge in crude oil prices, which have climbed above $80 a barrel as the U.S. and Iran escalated military strikes after a ceasefire collapsed. Higher oil prices feed directly into inflation expectations, which in turn push up long-term bond yields. The 10-year Treasury yield, which lenders use as a benchmark for pricing home loans, stood at 4.57% Thursday, up from 4.54% a week ago and well above the 3.97% level in late February before the conflict began.

Cooler-than-expected June inflation data released Tuesday provided brief relief, with the consumer price index showing prices paid by consumers for gas, clothes and other goods moderated last month. But the reprieve proved short-lived as energy concerns prevailed.

"Mortgage rates are caught between cooler inflation data and renewed energy risks," said Kara Ng, senior economist at Zillow. "Softer June inflation reduced the likelihood of a near-term Federal Reserve rate increase, but higher oil prices are keeping pressure on the inflation outlook and borrowing costs."

What Higher Rates Mean for Homebuyers

For borrowers, the increase translates into hundreds of dollars more in monthly payments. On a $400,000 loan, the difference between a 6% rate and a 6.55% rate adds roughly $140 per month, or more than $50,000 in additional interest over the life of a 30-year mortgage.

Refinance activity bucked the broader trend, rising 4% last week from the prior week and 7% from a year ago, driven largely by FHA and VA borrowers. But the overall refinance pool remains small, with rates only 17 basis points below year-ago levels offering limited incentive for most homeowners to act.

With oil prices likely to remain elevated as long as geopolitical tensions persist, mortgage rates may stay near current levels in the near term. The Fed's next policy meeting in September will be closely watched for any shift in the rate outlook, though central bank officials have signaled they are in no rush to cut.

This article is for informational purposes only and does not constitute investment advice.