Fed Is Meeting As Inflation Slows—What That Means For Mortgage Rates

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Fed Is Meeting As Inflation Slows—What That Means For Mortgage Rates

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Inflation is beginning to show signs of slowing, which means that the long streak of low mortgage rates is likely to extend into next year. So if you’re considering refinancing your home, this is still a good time to do so.

Consumer prices—a key measure of inflation—fell short of what was expected, rising just 0.3% in August from July, according to the latest report from the Labor Department. Overall, inflation rose 5.3% (before seasonal adjustment) for the 12 months ending in August.

Although one month’s data may not be significant, it is in line with what Federal Reserve Board Chairman Jerome Powell has noted about summer’s spikes in inflation being transitory. Supply and demand has been out of whack since Covid-19 struck, which sent inflation skyrocketing in July. So August’s report was a relief, especially considering the Federal Open Market Committee’s (FOMC) is meeting September 21 and 22 to discuss next steps on monetary policy.

How the Fed’s Monetary Policy Impacts What You Pay for a Mortgage

Mortgage rates have stayed near record lows since the spring of 2020. They dipped below the 3% mark last July for the first time in recorded history. Rates have stayed in the same range for a while now partly because of the Federal Reserve’s response to the Covid-19 pandemic and its potential damage to the economy as the unemployment rate hit record-highs.

Those actions included two key components: rolling back short-term interest rates to zero and pouring money into asset purchases—about $80 billion of Treasury securities and $40 billion of agency mortgage-backed securities (MBS) each month.

Powell has said that as the economy rebounds and Covid restrictions are loosened, production will likely pick up the pace, which will help temper inflation—and Tuesday’s inflation report might help everyone.

Lower inflation could mean that mortgage rates remain in the low 3% range for the foreseeable future. However, if inflation were to continue to rise, mortgage rates would follow.

“Investors are repaid in future dollars, and if inflation continued at a high rate, those future dollars are worth less, meaning that investors are likely to demand what an economist might call an inflation premium—a higher rate to compensate for the possibility of inflation undermining the value of the future dollars,” says Danielle Hale, chief economist at Realtor.com.

Related: Compare Current Mortgage Rates

Powell is expected to announce his plans for tapering by the end of this year, which is another way of saying that the FOMC will reduce its asset purchases.

However, even with some tapering, most experts agree that the FOMC’s policy will continue to be expansionary given that the unemployment rate remains significantly higher (5.2% in August) than pre-Covid levels (3.5%).

“I expect that the FOMC will announce at its early November meeting that it will start to gradually reduce its purchases of long-term Treasuries and mortgage-backed securities starting in December,” says Gus Faucher, chief economist at The PNC Financial Services Group. “This will put modest upward pressure on long-term interest rates, including mortgage rates, but monetary policy will still be highly expansionary, especially given the current near-zero fed funds rates.”

However, even with a reduction in asset purchases, problems in the rest of the world could continue to put downward pressure on rates, says Odeta Kushi, deputy chief economist for First American Financial Corporation.

“The global economy remains in a period of uncertainty due to the ongoing pandemic and the risk of the spread of variants, which may continue to put downward pressure on yields, and therefore mortgage rates,” Kushi says.

The federal funds rate is another tool the Fed can use to stimulate the economy. And although it has less of a direct impact on mortgage rates than bond buying, it still has some influence. However, Faucher says it’s highly unlikely that the FOMC will touch the federal funds rate this year.

The FOMC plans to keep the federal funds rate at zero until inflation hits its target of 2% and employment makes big gains, which are both longer-term goals. Faucher expects a hike to come in mid-2023 at the earliest.

The federal funds rate is the interest rate banks charge each other to borrow reserve balances overnight, which has a direct impact on short-term loans like credit card debt and home equity lines of credit (HELOCs).

One way the federal funds rate can influence mortgage rates is if banks pass on higher borrowing costs to consumers through long-term mortgage rates.

Where Rates Are Expected to Go in 2022

Most economists agree that mortgage rates will end 2021 in the low 3% range. However, that’s where the agreement ends. Some experts think rates will jump above 4% next year while others are expecting a more modest increase in 2022. Here’s what economists are saying:

The Mortgage Bankers Association predicts long-term rates to hit 4% by 2022 and top out at around 4.3% by the end of next year.
PNC expects the 30-year fixed mortgage rate to increase 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 forecasts the 30-year fixed mortgage to hit 3.4% by the fourth quarter of 2021 and 3.7% by the end of 2022.
The National Association of Realtors (NAR) predicts rates will get to 3.3% by the end of 2021 and average 3.6% in 2022.

Consider Refinancing if You Haven’t Already

Low mortgage rates can mean extra money in the bank for both homebuyers and homeowners. Although competitive home prices and lack of inventory in most real estate markets are canceling out the advantages of today’s low mortgage rates, people who already have mortgages might be able to save big.

With home prices rising so quickly, homeowners are seeing their equity soar in a short period of time. So borrowers who might not have had enough equity to lock in a lower mortgage rate last year, could 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 (high credit score, solid proof of income), you could qualify with less than 20% equity, but you might pay a slightly higher interest rate.

According to mortgage analytics company Black Knight, tappable equity—the amount you can borrow against minus the 20% equity in your home—hit $1 trillion in the second quarter of 2021. The average mortgage borrower has $173,000 in tappable equity, 13% more than in the first quarter.

Here’s how to find out how much equity you have:

First, get your home’s current value (you can use an online estimator to get a quick answer).
Next, subtract your current mortgage balance by 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.

But the amount of equity you have is just one part of determining whether you should refinance, you’ll also want to make sure the loan costs to refinance don’t outweigh the savings.

You can use a mortgage calculator to see how much money you can save each month (and in total interest over the life of the loan) by locking in a lower interest rate.

Remember to factor in closing costs, which can run anywhere from 2% to 6% of the total loan amount. So if you plan on staying in the home for several years, you’ll have a better chance of saving money with a refinance than if you sell within the next 12 to 18 months.

Similarly, if the interest rate you qualify for isn’t much lower than the one you have, it might not be worth the cost and hassle. There’s no telling when rates might rise (or fall), so you don’t want to assume they’ll stay low forever.

If you don’t qualify for a competitive rate and you want to refinance, 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 might take to do so.

Finally, be sure to shop around for a lender that not only offers low-interest rates, but a low APR, which is the total cost of the loan. Some lenders charge more in fees, which can detract from their advertised low rate. So be sure to get several quotes before you choose a lender.