US mortgage rates hit nearly 3-year high: What it means for homebuyers

According to CNN, the rise in mortgage rates is closely linked to turmoil in the US bond market. Mortgage rates tend to move with the yield on the 10-year US Treasury note. When Treasury yields rise, mortgage rates usually move higher as well.

Investors have been concerned that the war involving Iran and higher government spending could add to inflation. Persistent inflation could make it harder for the Federal Reserve to lower interest rates.

The concern is that the Federal Reserve may need to keep interest rates higher for longer to control inflation. Expectations of higher interest rates can push Treasury yields higher, which in turn puts upward pressure on mortgage rates.

For people looking to buy a home, this creates a difficult situation. Higher mortgage rates mean higher monthly payments and a greater overall cost of borrowing.

There is one possible advantage for some buyers. Higher rates can discourage other potential buyers from entering the housing market. This could reduce competition for homes in some areas and give buyers more room to negotiate with sellers.

Are there ways to get a lower mortgage rate?

CNN points out that buyers do not necessarily have to choose a standard 30-year fixed mortgage.

A 15-year fixed mortgage generally comes with a lower interest rate. The drawback is that the monthly payment is much higher because the loan has to be repaid in half the time.

Another option is an adjustable-rate mortgage, commonly known as an ARM.

ARM loans can initially offer lower rates than fixed-rate mortgages. Recent data showed that ARM loans accounted for 10.3% of mortgage applications, the highest share since October 2025. Their rates were around 80 basis points below those of fixed-rate loans.

The lower initial rate comes with more risk. An ARM usually has a fixed interest rate for a set period, such as five, seven or 10 years. After that, the rate can change based on market conditions.

If interest rates are higher when the loan resets, the borrower’s monthly payment could rise sharply.

An ARM could make sense for someone who expects to move or refinance before the initial fixed-rate period ends. It may not be suitable for someone who expects to stay in the home for a long time and wants predictable payments.

Can buyers take over an existing mortgage?

Another option is an assumable mortgage. This allows a buyer to take over the seller’s existing home loan, including its interest rate, if the loan qualifies and the lender approves the transfer.

Many government-backed loans, including some Federal Housing Administration, Department of Veterans Affairs and Department of Agriculture loans, can be assumed.

The major limitation is that the buyer takes over only the remaining balance on the seller’s mortgage.

For example, if a home costs $400,000 but the seller has only $250,000 left on the mortgage, the buyer would need to arrange another $150,000 to cover the difference.

This can require a large amount of cash upfront, even though the buyer benefits from the seller’s existing mortgage rate.

Paying upfront to reduce the rate

Buyers can also pay additional money upfront to reduce their mortgage rate. A permanent rate buydown lowers the interest rate for the entire duration of the loan. A temporary buydown lowers the rate for only the first few years. The decision depends on how much the upfront cost is and how long the buyer plans to keep the mortgage.

Buyers can also ask sellers or homebuilders to pay for a rate buydown. CNN notes that builders have increasingly been using incentives such as mortgage rate reductions and credits toward closing costs to attract buyers. Such incentives can be particularly useful in areas where there are more homes for sale than buyers.

Other ways buyers can reduce costs

Some buyers may qualify for government-backed mortgage programmes that offer more favourable terms. Veterans and certain service members may qualify for VA loans, while USDA loans are available to eligible buyers purchasing homes in qualifying rural areas.

Some banks and credit unions also offer lower rates to existing customers or people who move deposits and investments to them.

Shopping around is also important. Mortgage rates can differ between lenders even when market conditions are the same.

What the latest data shows

Reuters reported that the rise in mortgage rates comes as US government bond yields have surged. The 30-year fixed mortgage rate reached 7.28% this week, up from 7.03% a week earlier. Reuters described this as the largest weekly increase in about four years.

The 10-year Treasury yield, which is closely linked to mortgage rates, also rose sharply. It reached its highest level in nearly 25 years.

One reason for the increase is stronger-than-expected US economic growth. Data showed that economic growth during the first half of the year was stronger than previously estimated. Investors also expect that economic momentum continued into the third quarter.

Inflation remains another concern. According to Reuters, inflation is still more than one percentage point above the Federal Reserve’s 2% target.

Investors therefore expect the Federal Reserve to consider at least one more interest rate increase this year as it tries to bring inflation down.

Higher rates are already affecting demand for mortgages. The Mortgage Bankers Association reported another decline in mortgage application volumes as borrowing costs increased.

Mortgage rates have risen by more than 1.2 percentage points in the seven months since the United States and Israel launched attacks against Iran. The conflict contributed to higher global energy costs, adding to inflationary pressures.

The higher borrowing costs are affecting both potential homebuyers and existing homeowners who may want to refinance.

For buyers, the immediate impact is straightforward: a higher mortgage rate means a larger monthly payment and a higher total cost over the life of the loan.

The latest increase therefore adds another hurdle for Americans hoping to buy a home. While alternative mortgage products, rate buydowns, government programmes and lender incentives may offer ways to reduce the cost, each option comes with its own conditions and risks.