Still want to refinance? Do it before the Fed hikes rates in May
Refinance before the Fed hikes rates
If you want to refinance your mortgage before the Fed hikes rates, you need to start doing it as soon as possible.
The next Federal Reserve meeting on May 4, 2022 is likely to be a critical date for mortgage rates. The Fed has already indicated that it could hike rates by 50 basis points (0.50%) at this point.
This would be the first half-point increase in over 20 years. And while the Fed doesn’t set mortgage rates, they’re likely to go significantly higher if interest rates rise.
For anyone still waiting for a refinance, now is the time to request and set an interest rate before the Fed makes a historic move.
How likely is a Fed rate hike?
What is the probability of a half-point hike in the fed funds rate? Well, the CME FedWatch tool put the probability at 91% in mid-April.
But that could just be the beginning of a series of rate hikes. As the Wall Street Journal noted on April 14, “investors expect the Federal Reserve to act quickly to combat rising inflation in America by raising interest rates multiple times.”
The FOMC has six meetings scheduled for the remainder of 2022. And some fear that it will raise rates by 0.25-0.50% at each of those sessions. Some are even wondering if a 0.75% hike might be on the horizon.
Be that as it may, a higher interest rate environment seems inevitable. And while fixed-rate mortgage rates move independently of the fed funds rate, they often rise and fall with it. Mortgage borrowers can therefore also count on rising interest rates.
Who is affected by rising interest rates?
Almost all adjustable rate loans are linked directly or indirectly to the Federal Funds Rate. You can expect interest rates on credit cards, auto loans, personal loans, adjustable rate mortgages, and other such loans to rise very soon after May 4th.
In theory, Fed rate hikes don’t directly affect fixed-rate mortgages (FRMs). In practice, however, they tend to have an impact, and borrowers can expect higher fixed rates in the mortgage market.
With an existing fixed-rate mortgage, of course, nothing changes. Rate increases only apply to new borrowers, including homebuyers and existing homeowners hoping to refinance or pay off.
Who Should Refinance Now?
Mortgage rates have already risen, making refinancing unattractive for the majority of homeowners.
But for some, refinancing is still worth it. There are several reasons you might want to refinance before interest rates get even higher.
- If you have an adjustable rate mortgage (ARM).: ARM rates are directly tied to the broader rates market and will rise as the Fed raises its target rate. If you currently have an ARM, your existing incredibly low rate could soon become uncomfortably high. If your rate is going to change in the near future, you may want to refinance into a fixed-rate mortgage to avoid even higher interest rates down the road
- If you have an FHA loan, you can cancel mortgage insurance: If you have an FHA loan and your current mortgage has an LTV of 80% or less, now may be your last chance to refinance into a relatively low-interest conventional loan with no PMI. Talk to your loan officer about canceling mortgage insurance before interest rates continue to rise
- If you still have an interest rate that is higher than current market prices: If you bought your home a long time ago — or if your finances have improved since you bought it — your current mortgage rate could be higher than the current market. In this case, refinancing can be worthwhile to lower your rate and monthly payment
- If you want to have your owner-occupied home paid out: If you’re planning to cash out on home equity in the near future, try to do so sooner rather than later so you can secure the lowest possible interest rate on your new mortgage
If any of these apply to you then you should urgently review your options as refinancing rates could be increasing very soon.
The easing of mortgage incentives will also push interest rates higher
No one knows exactly what will happen to mortgage and refinancing rates on May 4th. The expectation of a 0.50% rate hike is so widespread that mortgage bonds have been trading for weeks as if it has already happened.
But even if the impact of this rate hike is limited or nil, the Fed will drop another bombshell at its next meeting. And it could have a far bigger impact on mortgage rates than a single rate hike.
The end of quantitative easing
As the COVID-19 pandemic took hold, the Fed launched a stimulus program to keep the economy afloat. It was called “quantitative easing” and involved cutting interest rates and buying bonds in bulk.
These bonds included mortgage-backed securities (MBS), which the Fed bought to artificially lower mortgage rates. And that has worked well, with 16 all-time lows in 2020, according to Freddie Mac’s archives.
On April 14, 2022, the Fed owned $2.74 trillion this MBS.
But recently, the Fed signaled that it will soon start depleting that $2.74 trillion stash. And it should unveil plans for it on May 4th.
MBS and higher rates
By buying large amounts of MBS, the Fed pushed mortgage rates to record lows in 2020 and 2021. And when it starts to run down its holdings, you can imagine what’s going to happen: rates will go even higher.
If these plans are more aggressive than markets expect, it could send mortgage rates skyrocketing. Of course, if they are less aggressive, mortgage rates could potentially go down.
But are you willing to bet your refinancing rate on the Fed loosening? Its recent rhetoric suggests it’s not in the mood to play well.
Refinance now before the Fed hikes rates
If you want to lock in your refinance rate before May 4th, there’s no time to waste.
Nobody, probably not even the Fed itself, knows exactly what will be announced on May 4th after the next FOMC meeting. Also, no one can be sure how the markets will react.
But whatever happens that day, we believe mortgage rates will continue to rise in the coming months. So if you have a good reason for a refinance and you want to do it before interest rates go up any further, now is the time to start.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for the products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policies or position of Full Beaker, its officers, parent companies or affiliates.