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Inflation is starting to show signs of slowing down, which means the long streak of low mortgage rates is likely to continue into next year. So, if you are considering refinancing your home, now is still a good time to do so.
Consumer prices, a key measure of inflation, were lower than expected, rising only 0.3% in August from July, according to the latest report from the Ministry of Labor. Overall, inflation rose 5.3% (before seasonal adjustment) for the 12 months ending in August.
While the one-month data may not be meaningful, it is consistent with what Federal Reserve Board Chairman Jerome Powell noted about the summer’s inflation spikes being transient. Supply and demand have been out of whack since the Covid-19 strike, which spiked inflation in July. The August report was therefore a relief, especially as the Federal Open Market Committee (FOMC) is meeting on September 21 and 22 to discuss the next steps in monetary policy.
How the Fed’s Monetary Policy Affects What You Pay for a Mortgage
Mortgage rates have remained near their lowest records since spring 2020. They fell below 3% last July for the first time in recorded history. Rates have stayed in the same range for some time now, in part 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. record levels.
These actions included two key elements: bringing short-term interest rates to zero and investing money in asset purchases – about $ 80 billion in treasury securities and $ 40 billion in asset-backed securities. mortgage loans (MBS) agencies each month.
Powell said that as the economy rebounds and Covid restrictions are relaxed, production will likely accelerate, which will help temper inflation – and Tuesday’s inflation report could help everyone.
Lower inflation could mean mortgage rates stay in the low 3% range for the foreseeable future. However, if inflation were to continue to rise, mortgage rates would follow.
“Investors are reimbursed in future dollars, and if inflation continues at a high rate, those future dollars are worth less, which means investors are likely to demand what an economist might call an inflation premium – a higher rate to compensate for the possibility of inflation. undermine the value of future dollars, ”says Danielle Hale, chief economist at Realtor.com.
Related: Compare current mortgage rates
Powell is expected to announce his phase-down plans by the end of this year, which is another way of saying the FOMC will cut back on asset purchases.
However, even with some decrease, most experts agree that FOMC policy will continue to be expansionary given that the unemployment rate remains significantly higher (5.2% in August) than the levels of ‘before Covid (3.5%).
“I expect the FOMC to announce at its meeting in early November that it will gradually start reducing its purchases of long-term Treasuries and mortgage-backed securities from December,” said Gus Faucher, Chief Economist of PNC Financial Services Group. “This will put slight upward pressure on long-term interest rates, including mortgage rates, but monetary policy will remain very expansionary, especially given current federal funds rates close to zero.”
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 at 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 on mortgage rates,” said said Kushi.
Another tool the Fed can use to stimulate the economy is the federal funds rate. And while it has less direct impact on mortgage rates than buying bonds, it still has some influence. However, Faucher says it’s highly unlikely the FOMC will hit the federal funds rate this year.
The FOMC plans to keep the fed funds rate at zero until inflation hits its 2% target and jobs make big gains, both of which are longer-term goals. Faucher expects a rise in mid-2023 at the earliest.
The federal funds rate is the interest rate banks charge each other for borrowing reserve balances overnight, which has a direct impact on short-term loans such as credit card debt and margins. home equity loan (HELOC).
The federal funds rate can influence mortgage rates if banks pass higher borrowing costs on to consumers through long-term mortgage rates.
Where rates should go in 2022
Most economists agree that mortgage rates will end in 2021 in the low range of 3%. However, this is where the deal ends. Some experts believe rates will rise above 4% next year while others expect a more modest increase in 2022. Here’s what economists are saying:
- The Mortgage Bankers Association predicts that long-term rates will reach 4% by 2022 and peak at around 4.3% by the end of next year.
- The PNC expects the 30-year fixed mortgage rate to rise from around 3.05% currently to around 3.2% by the end of this year and to 3.4% by the end of this year. 2022.
- Freddie Mac predicts that the 30-year fixed mortgage will reach 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 reach 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 additional funds in the bank for buyers and homeowners. While 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 may be able to save big.
With home prices rising so rapidly, homeowners are seeing their net worth skyrocketing in no time. So borrowers who might not have had enough equity to get a lower mortgage rate last year might have accumulated enough money to qualify for the most competitive rate.
Typically, lenders seek 20% of a home’s equity for refinancing purposes. However, if your financial situation is strong (high credit score, proof of strong income), you might qualify with less than 20% equity, but you might pay a slightly higher interest rate.
According to mortgage analysis firm Black Knight, available equity (the amount you can borrow minus 20% of your home’s equity) reached $ 1,000 billion in the second quarter of 2021. The mortgage borrower Average has $ 173,000 in disposable net worth, 13% more than in the first quarter.
Here’s how to know how much equity you have:
- First, get the current value of your home (you can use an online estimator to get 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. .
But the amount of equity you have is only one thing in determining whether you should refinance, you will also want to make sure that the costs of the loan being refinanced do not 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 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 with a refinance than if you sell within the next 12-18 months.
Likewise, if the interest rate you qualify for isn’t much lower than what you get, it might not be worth the cost and hassle. It’s unclear when rates might rise (or fall), so you don’t want to assume that they will stay low forever.
If you don’t qualify for a competitive rate and want to refinance, ask a lender or other financial professional how you can become a better candidate for a lower rate and how long it might take to do so. .
Finally, be sure to look for a lender who offers not only low interest rates, but a low APR, which is the total cost of the loan. Some lenders charge higher fees, which can adversely affect their low advertised rate. So make sure you get several quotes before choosing a lender.