At its latest meeting, the Federal Reserve signaled that it’s about to cut the amount of bonds it buys each month, and that it also could begin to raise interest rates as early as next year.
The mortgage market interpreted that news as the beginning of the end of super-cheap mortgage rates. In the week after the Fed’s Sept. 22 meeting, the average rate on a 30-year mortgage jumped 12 basis points, to 3.17 percent, according to Bankrate’s national survey of lenders.
Mortgage rates have given numerous head fakes in recent months. They hit an all-time low of 2.93 percent in January, climbed to 3.34 percent in March, then retreated to 3 percent by August.
Will this latest run-up in rates last? No one knows that answer for certain. But housing economists and market watchers generally agree that a variety of factors — including inflation, the economic recovery and the Fed’s pace of bond buying — are lining up to nudge rates higher.
And for the millions of homeowners who have yet to lock in historically low interest rates by refinancing, that money-saving opportunity soon might fade away.
“It’s more likely that rates will go up than down,” says Isaac Hacamo, an assistant professor of finance at Indiana University’s Kelley School of Business. “If you haven’t refinanced in the past few years, I would do it now.”
The Fed’s ‘taper’ defined
When the coronavirus pandemic cratered the U.S. economy in March 2020, the Fed responded with full force. The central bank slashed its key federal funds rate to near zero. The Fed also pumped money into the economy by snapping up mortgage-backed securities and other bonds to the tune of $120 billion a month.
To unpack that a bit, most mortgages issued in the U.S. are bundled together as mortgage-backed securities, then sold to investors. The Fed stepped in as a buyer of those securities, a way to make sure credit continues flowing at low interest rates.
The bond buying and other emergency measures came as part of an aggressive stimulus designed to keep the economy from going into the sort of deep freeze that made the Great Recession such a slog. After this recession, the first downturn in a decade, the U.S. economy quickly recovered much of its lost ground.
Labor markets rebounded. And some say the federal response worked a little too well — stocks have soared, and home prices surged to record levels. Inflation, long absent from the U.S. economy, is back. That has led calls for the Fed to stop stimulating the economy quite so much.
“The problem in the housing market is not that it needs support. It’s that it is pricing out Americans,” Mohammed El-Erian, chief economic adviser at Allianz SE, told Bloomberg TV. “Americans can no longer afford what’s happening in the housing market.”
At last month’s meeting, the Fed said all of those factors mean it’s time for the central bank to stop flooding the economy with money by snapping up bonds.
“If progress continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted,” the Federal Open Market Committee said in its post-meeting statement.
Economists sum up that meandering mouthful of verbiage as the “taper.”
How the taper might affect mortgage rates
Mike Fratantoni, chief economist at the Mortgage Bankers Association, says the Fed’s September announcement has all but committed the central bank to announcing a taper at its next meeting, in early November.
“To paraphrase Chekov, if at the September meeting the Fed lays out a tapering plan, they must use it in November,” Fratantoni says. “There would need to be a significant negative surprise in the incoming data for them to delay.”
However, even if the Fed follows through and slows its pace of bond buying, Fratantoni doesn’t expect a sharp rise in mortgage rates.
“The pending taper and change to the monetary policy outlook will likely contribute to a modest increase in mortgage rates over the medium term,” he says.
Lynn Reaser, chief economist at Point Loma Nazarene University, likewise predicts a steady rise in mortgage rates rather than a steep climb. Indeed, it’s possible that the most dramatic move already happened.
“The market seems to have already priced in a slowing down of Fed asset purchases,” Reaser says. “The Fed is likely to announce only a small adjustment to the amount of securities it purchases each month, from $120 billion to $110 billion or $105 billion. The market will have already anticipated the announcement — and might even welcome it as a step to stem inflation.”
How to refinance your mortgage
We’ll leave it to the economists to debate the details of the Fed’s asset purchases. For homeowners who haven’t locked in a super-low rate in the past year, here’s a guide:
- Step 1: Set a clear goal. Have a compelling reason to refinance. It could be cutting your monthly payment, shortening the term of your loan or pulling out equity for home repairs or to repay higher-interest debt. Perhaps you want to roll your HELOC into a refi.
- Step 2: Check your credit score. You’ll need to qualify for a refinance just as you needed to get approval for your original home loan. The higher your credit score, the better refinance rates lenders will offer you — and the better your chances of underwriters approving your loan.
- Step 3: Determine how much home equity you have. Your home equity is the value of your home in excess of what you owe your mortgage lender. To find that figure, check your mortgage statement to see your current balance. Then, check online home search sites or get a real estate agent to run an analysis to find the current estimated value of your home. Your home equity is the difference between the two. For example, if you owe $250,000 on your home, and its value is $325,000, your home equity totals $75,000.
- Step 4: Shop multiple mortgage lenders. Getting quotes from multiple mortgage lenders can save you thousands. Once you’ve chosen a lender, discuss when it’s best to lock in your rate so you won’t have to worry about rates climbing before your loan closes.
- Step 5: Get your paperwork in order. Gather recent pay stubs, federal tax returns, bank statements and anything else your mortgage lender requests. Your lender will also look at your credit and net worth, so disclose your assets and liabilities upfront.