Why Mortgage Rates May Stay Stable Despite the Fed Hike

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The average mortgage rate was virtually unchanged this week, and experts say it could remain fairly stable if the Federal Reserve does what the market expects next week.

The average 30-year fixed rate was 5.76%, down just one basis point from a week ago, according to a survey by Bankrate, which, like NextAdvisor, is owned by Red Ventures. This holding pattern comes after a volatile June and early July that saw rates rise and fall significantly. In a similar survey by government-sponsored entity Freddie Mac, the 30-year fixed rate average rose just three basis points to 5.54%.

This was precipitated by a higher-than-expected inflation rate that came days before a Federal Reserve meeting, when the Fed suddenly moved from a 50 basis point hike in its short-term interest rate reference term to a more significant increase of 75 points. to cope with rising inflation.

Despite a high inflation rate of 9.1% in June, observers expect the Fed to maintain a 75-point hike again next week. As long as there are no surprises, experts say the mortgage market is unlikely to overreact. “The market has already priced in an increase,” says Peter Boomer, executive vice president of PNC Bank.

Lenders base their interest rates on what it costs them to lend money to consumers, which is affected by inflation, says Eileen Derks, senior vice president and head of mortgages at Laurel Road, an online lender owned by KeyBank that specializes in healthcare. professionals. Mortgage rates often move in anticipation of expected increases in lenders’ costs to avoid a sudden sticker shock, she says.

“We might actually see things leveling off a bit,” she says.

Greater volatility could still arise for mortgage rates. “I think we’re going to be on a bit of a rollercoaster ride” as the country navigates its efforts to reduce inflation and avoid a recession, Boomer said.

However, the Fed’s decision could have implications for other aspects of your financial life: it will likely lead to higher interest rates for home equity loans and lines of credit (HELOCs), as well as better returns on high-yield savings accounts and other savings tools. .

What today’s mortgage rates mean for consumers

The average mortgage rate is between 5% and 5%, but that’s just the average. Borrowers in the same location looking for similar loans may be offered vastly different rates — perhaps one is listed at 5% and another at 7% — depending on their credit, Derks says. This is why it is important to work on your credit score. “Take care, first and foremost, of the quality of your credit,” she says.

Borrowers might be able to get help from unexpected places. When looking for a mortgage lender, ask your current banks or financial institutions if they have offers for existing customers, Derks says. Associations you belong to, such as the American Medical Association for Doctors, may also be able to help.

Also consider your different mortgage options. More and more borrowers are considering adjustable rate mortgages, Derks and Boomer said. This can make sense as long as you know the risks: most ARMs have a lower interest rate for a fixed period at the start of the loan, perhaps five, seven or 10 years, then the rate changes regularly thereafter , usually every six months or every year, depending on the market. The lower teaser rate can make a home more affordable, especially if you plan to move after a few years. You can also refinance during this time if rates drop.

“Take inventory of your personal needs,” says Derks. “How long am I going to stay in this house? It’s really important. Some people say I don’t know, but especially with our cohort, doctors and dentists, they move a lot.

Pro tip

If you don’t plan to stay in the house for more than two years, you may be able to get a lower interest rate with an adjustable rate mortgage. Just understand that if you don’t move or refinance by the end of the introductory period, your rate could change significantly.

How Buyers Can Navigate Higher Rates and Home Prices

Rates are higher than they have been in years, and much higher than the roughly 3.3% they were at the start of the year, but “they are still at historic lows” when looking at rates from before the financial crisis of the 2000s, Boomer says.

Yet homebuyers are seeing their ability to afford a home affected by rapidly rising mortgage rates as home prices hit all-time highs. Rising mortgage rates have dampened some demand for homes, as home sales have fallen in recent months, which could lead to lower prices or at least a slower increase in many markets.

This means buyers are regaining some bargaining power they lost during the hottest years of this property boom. One way they use it is to lower their mortgage rates, Boomer says. “More people are asking the seller to contribute a point or two to lower the interest rate,” he says. “That surprised me a bit.”

The way it works is that a buyer interested in a house might be able to offer less money to buy it, but instead they offer at the asking price but ask the seller to contribute mortgage points, which would give the seller a lower interest rate, Boomer said. Buyers should talk to a loan officer and see if the strategy will get them a lower monthly payment — and a lower home purchase cost in the long run.

Whatever happens with interest rates in the coming weeks, Derks says the most important thing is to make sure you can afford the home you’re considering. “In this environment, if the rates are a little higher, really think about needs versus wants in order to get into a home you can afford,” she says. “Make sure you can afford it and enjoy your life and don’t live for your home.”

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