What Rising Rates Mean for Mortgage Lenders

Interest Rates Climb from Historic Lows

Interest rates have been historically low the past several years, except for a slight uptick in 2018. The pandemic has pushed them even lower. But last week, mortgage rates climbed to their highest weekly average since August.

For companies like Rocket Mortgage (RKT), which make and sell home loans, climbing mortgage rates can cause falling demand.

Rocket Mortgage’s Predictions

Despite the interest rate uptick, Rocket says it expects its origination volume to stay fairly consistent. Last week, Rocket said it predicts that it will close on about $100 billion of loans this quarter, compared to $107 billion in the fourth quarter of last year.

Investors are also examining how much originators are earning on each mortgage they sell. Rocket shared that its quarter-over-quarter gain-on-sale margin declined from 4.52% to 4.41%. This decline was less than one-third as much as the median drop for mortgage lenders and banks on the whole.

What Rising Rates Mean for People with Mortgages

There are different types of mortgage loans, and what rising rates means will depend on the kind of loan you have.

A fixed-rate mortgage (FRM) has an interest rate that stays the same for the entire life or “term” of the loan, even if it’s 30 years. The rate remains fixed regardless of any changes that might occur in the broader economy.

By its nature, a fixed-rate loan shields you from fluctuating interest rates. As interest rates rise, the cost of borrowing can rise as well. With an FRM, the mortgage rate is locked in for the life of the loan—even if lending rates rise significantly during that period.

An adjustable-rate mortgage (ARM) loan is so named because the interest rate can change over time. In many cases, an ARM loan’s rate will stay the same for a specified period of time, such as five or seven years.

Borrowers with adjustable mortgage loans tend to secure lower initial interest rates than those who use fixed-rate loans. But as lending rates rise, so does the borrower’s payment.

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