Mortgage rates climbed to their highest level in a year Thursday, adding hundreds of dollars to the cost of financing a typical home and threatening to push more prospective buyers out of an already difficult housing market.

Freddie Mac said the average rate on a 30-year fixed mortgage rose to 6.66% from 6.58% a week earlier, marking the fourth consecutive weekly increase. The average 15-year fixed rate climbed to 6.04% from 5.96%.

The latest move reverses much of the relief buyers received earlier this year, when the 30-year rate briefly fell close to 6%. For a household borrowing $400,000, a 6.66% rate produces a monthly principal-and-interest payment of approximately $2,571, before property taxes, homeowners insurance and association fees are added.

That same loan would have cost about $2,414 a month at 6.06%, the level reached in January. The difference is roughly $157 every month, or nearly $1,900 a year, without any change in the price of the home.

For many buyers, the larger effect is not simply a higher payment. Mortgage lenders qualify borrowers based partly on how much of their monthly income would be consumed by housing and other debts. As rates rise, some households must lower their offers, increase their down payments or abandon a purchase entirely.

A buyer who could previously afford a $500,000 property may now need to search at a lower price point to keep the payment within the same budget. That puts additional competition on moderately priced homes, where inventory is already limited.

Mortgage applications fell 6.4% during the week ending July 24, according to the Mortgage Bankers Association. Both purchase and refinancing activity weakened as higher rates reduced the financial benefit of replacing an existing loan or entering the market.

Refinancing has become especially unattractive for millions of homeowners who secured mortgages below 4% before borrowing costs surged. Replacing those loans at current rates would sharply increase monthly payments, even when homeowners need cash, want to shorten their loan term or hope to remove another borrower.

That gap has also intensified the housing market’s lock-in effect. Homeowners with low-rate mortgages are reluctant to sell because purchasing another property would require financing at a much higher rate. Fewer listings then help keep home prices elevated, leaving buyers squeezed by both borrowing costs and limited supply.

Mortgage rates do not move directly with the Federal Reserve’s overnight benchmark rate. They are more closely connected to yields on longer-term government debt, particularly the 10-year Treasury note, because mortgage-backed securities compete with Treasury bonds for investor money.

Treasury yields have risen as investors price in the risk that inflation could remain elevated and that interest rates may stay higher for longer. Rising oil and transportation costs have added to those concerns because energy expenses can spread into airfare, food distribution, deliveries, manufacturing and other consumer prices.

Although the Federal Reserve left its policy rate unchanged this week, disagreement among officials over whether inflation requires additional tightening has reduced expectations for rapid rate relief. Mortgage borrowers are therefore unlikely to benefit immediately even if the central bank eventually begins lowering short-term rates.

Consumers should also recognize that Freddie Mac’s weekly figure is an average, not a guaranteed offer. Actual mortgage quotes vary according to credit score, down payment, loan size, property type, location and whether the borrower pays upfront discount points.

Shopping among lenders can produce meaningful savings because even a quarter-point difference in rate can change a household’s payment and total interest expense. Borrowers should compare the annual percentage rate, closing costs and required points rather than focusing only on the advertised interest rate.

Adjustable-rate mortgages may appear more attractive when fixed rates rise, but they transfer future interest-rate risk to the borrower. Initial payments can be lower, yet the rate may reset upward after the introductory period, making the loan more expensive if market rates remain elevated.

Home builders and sellers may increasingly respond with financing incentives instead of large price reductions. Temporary rate buydowns, closing-cost assistance and permanent mortgage-rate subsidies can lower a buyer’s initial payment while allowing the seller to preserve the advertised property value.

Those concessions are less common in areas where housing supply remains tight, leaving many first-time buyers with fewer negotiating options. Renters considering a purchase must also weigh a mortgage payment against property taxes, insurance, repairs and other ownership expenses that have risen in many regions.

The next direction for mortgage rates will depend heavily on inflation data, Treasury yields and signals from the Federal Reserve. Until those pressures ease, the housing market is likely to remain caught between buyers who cannot comfortably afford current payments and owners unwilling to surrender mortgages obtained at historically low rates.

JBizNews Desk | Washington, D.C.

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