Well, it’s happening. After months of anticipation, the Federal Reserve has finally begun what is likely to be a gradual process of normalizing interest rates.
On Wednesday, Federal Reserve officials acknowledged that the economy is strengthening and that there is an uptick in inflation. They also mentioned that increases to the federal funds rate could come in 2023.
Now, mortgage rates do not follow the federal funds rate – which still remains unchanged – but generally track the yield on the 10-year Treasury Bond. And although the bank didn’t mention when they would start scaling back their massive bond-buying program, their comments sent the bond market into a frenzy and caused investors to sell their bonds.
This pushed mortgage rates sharply higher. On Thursday, the average rate on a 30-year fixed mortgage hit 3.25%, according to Mortgage News Daily. This is the highest rate since mid-April.
Matthew Graham, chief operating officer of Mortgage News Daily, offered some insight as to why this happened:
Markets were somewhat surprised by the Fed’s rate hike outlook. Granted, the Fed Funds Rate doesn’t control mortgage rates, but the outlook speaks to how quickly the Fed would need to dial back its bond buying programs (aka ‘tapering’). Those programs definitely help keep rates low.
What Does This Mean For Mortgages?
Mortgage rates are now nearly a quarter of a percentage point higher than they were last Friday and about a quarter of a percentage point higher than they were a year ago.
While that may not sound like a lot, it is significant for those looking to save on their monthly payments through a refinance. Rates dropped dramatically last Fall, and by February 2021 the average rate on the 30-year fixed was 2.75% – which caused a refinance boom.
Now, applications to refinance a home loan are 22% lower than they were a year ago, according to the Mortgage Bankers Association. There are now far fewer borrowers who can benefit from a refinance.
As for homebuyers, given today’s sky-high home prices, any move higher in rates is not only going to hit the monthly payment but may make it harder to qualify for a mortgage.
According to Danielle Hale, chief economist for realtor.com:
For home buyers, this means it’s a good idea to take a fresh look at your home shopping budget. Run the numbers and know what it means for your search price if rates tick up a quarter point, but keep these worries in context.
Even if mortgage rates rise, they are not the biggest challenge for today’s buyers, who are still contending with relatively few, fast-selling home choices and record high asking prices.
Higher interest rates are on the horizon. Even though housing inventory is tight and home prices are rising, you can still get a great deal on a home by locking in a low interest rate today.
Additionally, if you have been in your mortgage for several years, now is the time to consider a refinance before you lose out on the opportunity for huge savings.
To begin the process, fill out the form below to request a consultation with one of our mortgage advisors. They can provide you a simple breakdown of the best mortgage options today, and even show you what the cost would be if you decided to wait to buy or refinance.