Fed meets as inflation slows – what that means for mortgage rates – Forbes Advisor
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Consumer prices – a key measure of inflation – fell short of expectations, increasing just 0.3% in August versus July report from the employment office. Overall, inflation rose by 5.3% in the twelve months to August (before seasonal adjustment).
While one month’s data may not be significant, it is in line with what Federal Reserve Board Chairman Jerome Powell noted about temporary summer inflation spikes. Supply and demand have gotten out of hand since the Covid-19 outbreak, causing inflation to skyrocket in July. So the August report was a relief, especially considering that the Federal Open Market Committee (FOMC) will meet on September 21-22 to discuss the next steps in monetary policy.
How Fed Monetary Policy Affects What You Pay For A Mortgage
Mortgage rates have stayed near record lows since spring 2020. They fell below 3% for the first time in history last July. Interest rates have stayed in the same range for some time, partly due to the Federal Reserve’s response to the Covid-19 pandemic and its potential harm to the economy as the unemployment rate hit record highs.
These measures had two key components: bringing short-term interest rates down to zero and investing money in buying assets – about $ 80 billion in government bonds and $ 40 billion in agency mortgage-backed securities (MBS).
Powell has said that as the economy recovers and Covid restrictions are relaxed, production is likely to pick up, which will help curb inflation – and Tuesday’s inflation report could help everyone.
Lower inflation could mean that mortgage rates remain low around 3% for the foreseeable future. However, should inflation continue to rise, mortgage rates would follow.
âInvestors are repaid in future dollars, and if inflation stays high, those future dollars are worth less, which means investors are likely to charge an inflation premium that an economist might call – a higher rate to offset the possibility of inflation . “Undermine the value of future dollars,” said Danielle Hale, chief economist at Realtor.com.
Related: Compare the current mortgage rates
Powell is expected to announce its plans for a cut by the end of this year, which is another way of saying the FOMC will cut its stock purchases.
However, despite some reduction, most experts agree that FOMC policy will continue to be expansionary as the unemployment rate remains significantly higher (5.2% in August) than it was before Covid (3.5%).
“I expect that the FOMC will announce at its meeting in early November that it will gradually reduce its purchases of long-term government bonds and mortgage-backed securities starting in December,” said Gus Faucher, chief economist of the PNC Financial Services Group. “This will put some upward pressure on long-term interest rates, including mortgage rates, but monetary policy will still be very expansionary, especially given the current Fed Funds interest rate close to zero.”
But even with a reduction in bond purchases, problems in the rest of the world could put interest rates under further pressure, says Odeta Kushi, deputy chief economist at First American Financial Corporation.
“The global economy is in a phase of uncertainty due to the ongoing pandemic and the risk of the spread of variants that could put returns and thus mortgage rates under further pressure,” says Kushi.
The Federal Funds Rate is another tool the Fed can use to stimulate the economy. And while it has less of a direct impact on mortgage rates than buying bonds, it still has some impact. Faucher says, however, that the FOMC is very unlikely to touch the federal funds rate this year.
The FOMC plans to keep policy rates at zero until inflation hits its target of 2% and employment hits big gains, both of which are longer-term goals. Faucher does not expect an increase until mid-2023 at the earliest.
The federal funds rate is the interest rate banks charge each other to borrow overnight reserves, which directly affects short-term loans such as credit card loans and home equity lines of credit (HELOCs).
One way the federal funds rate can affect mortgage rates is for banks to pass the higher cost of borrowing on to consumers through long-term mortgage rates.
Where prices are expected to rise in 2022
Most economists agree that mortgage rates will be in the low 3% range by the end of 2021. However, this is where the agreement ends. Some experts expect rates to rise above 4% in the next year, while others expect a more modest rise in 2022. This is what economists say:
- The Mortgage Bankers Association predicts that long-term rates will hit 4% by 2022 and around 4.3% by the end of next year.
- PNC expects the 30-year fixed-rate mortgage rate to rise from around 3.05% currently to around 3.2% by the end of this year and 3.4% by the end of 2022.
- Freddie Mac predicts the 30-year fixed-rate mortgage will hit 3.4% by the fourth quarter of 2021 and 3.7% by the end of 2022.
- The National Association of Realtors (NAR) predicts that rates will rise to 3.3% by the end of 2021 and an average of 3.6% in 2022.
Consider refinancing if you haven’t already
Low mortgage rates can mean extra money in the bank for both home buyers and homeowners. Although competitive home prices and a lack of inventory in most real estate markets negate the benefits of today’s low mortgage rates, people who already have mortgages can potentially save a lot.
Because property prices are rising so quickly, homeowners see their equity skyrocket in a short amount of time. Borrowers who may not have enough equity to secure a lower mortgage rate in the past year may have amassed enough by now to qualify for the most competitive rate.
Generally, lenders look for 20% equity in a home for refinancing. However, if your financial picture is strong (good credit, solid income statement), you may qualify with less than 20% equity, but you may be paying a slightly higher interest rate.
Vulnerable equity – the amount you can raise minus the 20% equity in your home – hit $ 1 trillion in Q1 in the second quarter of 2021, according to mortgage analyst Black Knight.
How to find out how much equity you have:
- First, find out the current value of your home (you can use an online appraiser for a quick answer).
- Next, subtract your current mortgage balance from the market value of your home.
So if your home is worth $ 350,000 and you owe $ 200,000 on your mortgage ($ 350,000 – $ 200,000), your equity is $ 150,000 and you have 42.8% equity in your home.
However, the amount of equity you have is only part of the decision whether you should refinance. You should also make sure that the cost of borrowing for refinancing does not outweigh the savings.
You can use a mortgage calculator to see how much money you can save each month (and the total interest over the life of the loan) by setting a lower interest rate.
Remember to take into account the closing costs, which can range from 2% to 6% of the total loan amount. So if you plan to stay in the house for several years, you have a better chance of saving money on a refinance than if you sell within the next 12 to 18 months.
If the interest rate you qualify for isn’t much lower than what you have, it may not be worth the cost and hassle. There’s no telling when interest rates might go up (or down), so don’t assume they will stay low forever.
If you don’t qualify for a competitive rate and want to get refinancing, talk to a lender or other financial professional about how you can make yourself a better candidate for a lower rate and how long it can take.
Finally, you should look for a lender that not only offers low interest rates, but also a low APR, which is the total cost of the loan. Some lenders charge higher fees, which can detract from their advertised low interest rate. So be sure to get multiple quotes before choosing a lender.