Mortgage rates climb to their highest level in 16 years

Borrowing costs for home loans have reached their highest point in 16 years, with the interest on a conventional 30-year mortgage hitting 6.7% on Wednesday, according to Freddie Mac.

Mortgage rates have now more than doubled since the beginning of 2022. As measured by their "effective" rate, which factors in the compounding period for a loan and which thus offers a truer picture of the cost to homebuyers, mortgage rates are now just above 7%, according to Oxford Economics. 

A percentage point increase to a mortgage rate can add hundreds of dollars to a property's monthly payments, depending on the size of the loan. Those sharply higher costs are chilling the housing market. The number of mortgage loan applications dropped roughly 14% during the final week of September, according to the Mortgage Bankers Association. 

Borrowing $300,000 at a rate of 6% on a typical mortgage would add up to $1,800 per month including principal and interest, according to NerdWallet. Earlier this year, when interest rates hovered around 3.5%, that same loan would've amounted to a monthly payment of $1,350.

House hunters in the U.S. have been hit this year with a one-two punch of skyrocketing mortgage rates and still high home prices. The rising cost of homeownership is deterring many aspiring buyers, who instead have opted to continue renting. 

"It is beginning to look as though home sales will be crushed to the point where the only people buying homes are those with no choice, for family or job relocation reasons," Ian Shepherdson, chief economist with Pantheon Macroeconomics, said in a report. 

Some relief for buyers may be on the horizon, as home prices are starting to fall and are likely to continue declining in certain real estate markets, economists predict. Home prices in Sacramento, California; Salt Lake City, Utah; and Seattle, Washington, are seeing some of the steepest declines.

Economists expect mortgage costs to stay elevated as the Federal Reserve continues to hike its benchmark interest in an effort to cool inflation, including two more hikes by year end.