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If you're ready to buy a house, mortgage rates may feel like the biggest hurdle.

Not only are they more than double their pandemic-era lows, but they're moving in the wrong direction. Last week, the average rate on a new 30-year fixed mortgage was 6.95%, according to data from Freddie Mac. That's virtually a full percentage point higher than it was six months ago.

“For many households, that is not a minor fluctuation,” said Devon Hawkins, an assistant professor of economics at Elon University in North Carolina. “It can be the difference between qualifying for a home and being priced out of the market entirely.”

For a short period earlier this year, it seemed like maybe the housing affordability crisis had turned a corner. Moderating prices and more listings were giving buyers new leverage, and mortgage rates briefly dropped into the 5% range. But this latest spike in rates — a byproduct of rising inflation — has changed the picture yet again.

The inflation connection

Mortgage rates are climbing again because the latest spike in oil prices has renewed fears of widespread inflation. Generally speaking, the greater the risk of inflation, the higher mortgage rates go.

(If you're wondering why, there are a couple of reasons: First, most 30-year mortgages don't last more than ~10 years, so their rates loosely track the yields on 10-year Treasury bonds. When inflation threatens to erode the value of those Treasuries, wary bondholders sell, triggering higher yields. Second, institutional investors can buy and trade bonds backed by bundles of mortgages, so similar dynamics apply.)

For prospective buyers, the core dilemma comes down to timing: Where do rates go from here, and how long are you willing to wait?

Even before this recent surge, higher borrowing costs took a heavy toll on purchasing power: Consider a $400,000 home bought with a 20% down payment. A 30-year mortgage charging 6% interest costs roughly $1,920 a month — about $570 more than if it charged 3% (a rate common during the pandemic.) Pushing from 6% to 7% adds another $210 a month. And those numbers don't include insurance or property taxes.

The outlook for mortgage rates – and the tradeoffs

Mortgage rates could stay high for a while. Last week the Federal Reserve reinforced inflation fears by not only raising its benchmark interest rate, but signaling more hikes are ahead. In response, the Mortgage Bankers Association (MBA) said it expects mortgage rates to “stay near current levels over the forecast horizon.” As Realtor.com Chief Economist Danielle Hale recently said, the pressure on rates “doesn't show signs of relenting.”

Here's the trade-off: The real estate market has gotten more buyer friendly. But that's only helpful to people who can realistically afford a house now. On the other hand, waiting for mortgage rates to drop significantly could mean sitting on the sidelines indefinitely — or worse, facing even higher rates or property prices in the future.

Evaluating your next move

First, a quick reality check: If today's rates stretch your monthly budget past its breaking point, delaying is a completely valid — and potentially necessary — move. Waiting protects your cash flow and gives you time to build your down payment.

But if you don't want to hold off, the challenge is finding a way to make the math work without overextending yourself. Here are three options to consider.

Look into new construction

Depending on where you live, builders may be offering appealing incentives to buy their newly built homes. In August, about 14% of the nation's new construction listings advertised a reduced mortgage rate averaging under 4% — with the highest concentrations in Columbus, Ohio, and parts of Colorado, Idaho, Texas, North Carolina, and Georgia, according to Realtor.com research.

Granted, many of these low rates may be temporary builder buydowns lasting as briefly as one year, so you'll want to make sure you understand the offer. But many builders do subsidize lower fixed rates, according to Realtor.com, so it's definitely worth exploring.

“October through December can be a favorable time to negotiate for these incentives because many builders are focused on year-end closings and reporting goals,” said Jon Brooks, co-founder of Momentum Realty, a Florida real estate brokerage. Just make sure a heavily promoted incentive isn't offset by a higher sale price or other restrictions, he said.

Buy and hope for (but don't count on) refinancing

Buying now has some advantages. In a market where sellers far outnumber buyers, buyers have more leverage to negotiate on price and other concessions.

“Now can still be a great time to buy a home,” said Kara Whitman, a senior mortgage loan originator at SoFi. “If you wait for rates to come down, you'll be competing with everyone else and home prices may be even higher. It's generally better to get the home you want now with a plan to refinance later.”

Just keep in mind that you never want to count on refinancing at a lower rate. If rates don't drop, you'll be stuck with a payment you can't afford.

“The rate you could get today should be the rate you plug into your budget to see if it works,” said Evan Mills, a financial advisor at Scholar Advising, an independent investment advisor. “If a refinance opportunity comes up in the future, that's great. But it shouldn't be the number that actually makes the math work.”

Compromise on size or location

If you haven't already, consider adjusting your criteria so you could get a smaller mortgage. For example, expand your search radius, look at smaller layouts, or consider a condo.

Related Reading

The Stagnant Housing Market Is About to Face a 7% Mortgage (The Wall Street Journal)

How Do I Get the Lowest Mortgage Rate? 8 Tips You Can Use (Yahoo)

Renting vs. Buying in Today's Market: How to Decide (SoFi)

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