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Why are mortgage rates moving around so dramatically?

Fed Reserve Chairman Jerome Powell Speaks At The "Conference On The International Roles Of The U.S. Dollar"
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Just two weeks ago, mortgage rates were headed to 6 percent. The consensus among investors and lenders was that mortgage rates would stay at their highest levels in more than a decade.

Instead, rates have taken a turn. The average rate on a 30-year loan plunged 30 basis points in the past week, according to Bankrate’s weekly survey of lenders.

Why the about-face? Blame the ongoing battle between inflation and an overheating economy on one hand, and a Fed-fueled recession on the other.

“Concerns about recession have gotten the upper hand, and that has stoked a belief that the Fed will change course – such as stopping rate hikes – sooner than previously thought,” says Greg McBride, Bankrate’s chief financial analyst. “The economy is slowing, but the inflation issue hasn’t been put to bed by any means, so a bad consumer price index reading next week could quickly erase the decline we’ve seen over the past few weeks.”

The Fed is moving aggressively

Inflation is running hot. Spurred on by the pandemic stimulus and exacerbated by supply-chain chokepoints, consumer prices rose at an annual pace of 8.6 percent as of May, according to the U.S. Labor Department. That’s far higher than the Federal Reserve’s target rate of 2 percent.

Seeking to rein in inflation, the central bank in mid-June raised rates three-quarters of a percentage point, its largest hike since 1994. And mortgage rates responded – in the week after the Fed meeting, the average rate on a 30-year loan in Bankrate’s survey climbed to 5.91 percent. That was the highest reading since June 2009.

However, the Fed doesn’t directly set mortgage rates. And with many expecting another nasty inflation report for June, the central bank could raise rates another three-quarters of a percentage point at its meeting in late July. That has many investors worrying that, as the Fed tries to tame inflation, it will send the economy into recession.

Counterintuitively, a rate hike by the Fed could lead to lower mortgage rates, some say.

“Should the Fed pull the trigger on another 50 or 75 basis points at the next meeting, I can see mortgage rates coming down even more,” says Jim Sahnger of C2 Financial Corp. in Jupiter, Florida.

What volatility in mortgage rates means for consumers

One bright spot of falling mortgage rates is that they make homes slightly more affordable to buyers.

“Mortgage rates plunged this week,” says Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors. “As a result, homebuying is about 5 percent more affordable than a week ago. This translates to about $100 less every month on a mortgage payment.”

Sahnger, meanwhile, is advising homeowners and homebuyers to prepare for further declines in mortgage rates. “I’d say get application in the system and look to take advantage of additional weakness in the economy as rates could continue to improve,” Sahnger says.

In times of volatility, a mortgage rate lock is a smart move – this tactic protects you from increases in rates during the near future.

The drop in rates also makes cash-out refinances more attractive compared to a home equity line of credit (HELOC) or second mortgage for homeowners planning major renovations or debt consolidation. With rates still higher than they were just a few months ago, however, cash-out refis are best reserved for those who need a substantial sum of money for a specific goal and plan to stay in their home for the foreseeable future.

Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
Edited by
Mortgage editor