If you haven’t refinanced your home recently, now is the time!
If you have a mortgage over 3%, you should consider refinancing. Mortgage rates resumed rising again last week, reminding homeowners of the urgency of refinancing. The average rate on 30-year mortgages rose to 3.22%, according to Bankrate’s weekly survey of large lenders. A quick search on bankrate.com shows 30 yr. loans at 2.75% with no points as of 10/25/2021. As of that date, 20 yr. loan rates were 2.50% and 15 yr. loans were about 2%.
Mortgage experts expect rates to continue to move up from the all-time bottom achieved earlier this year. A year ago, the benchmark 30-year fixed-rate mortgage was 3.06%. Four weeks ago, the rate was 3.05%. Over the last year, we have seen a 52-week high of 3.34%, and a 52-week low of 2.93%.
“Rates will inevitably trend higher in coming months,” says James Sahnger of C2 Financial Corp. in Jupiter, Florida. “If you haven’t refinanced, time to get busy doing so.”
What causes rates to rise or fall?
The Federal Reserve does not set mortgage rates, and the central bank’s decisions don’t drive mortgage rates as directly as they do other products, like savings and CDs. But the Fed’s actions do indirectly influence the rates consumers pay on their fixed-rate home loans when they refinance or take out a new mortgage. At its September meeting, the Fed indicated it plans to keep rates low at least until 2022, despite a brightening economic picture and a jump in inflation in recent months.
“The Fed is inching closer to tapering, the process of slowly – very slowly – dialing back their bond purchases,” says Greg McBride, CFA, Bankrate chief financial analyst. “The stock market has been a direct beneficiary of the Fed’s stimulative actions and the prospect of reducing that is sure to spark heightened market volatility.”
Fixed-rate mortgages are tied to the 10-year Treasury rate. When that rate goes up, the popular 30-year fixed-rate mortgage tends to do the same and vice versa. Rates for fixed mortgages are influenced by other factors, such as supply and demand. When mortgage lenders have too much business, they raise rates to decrease demand. When business is light, they tend to cut rates to attract more customers.
Price inflation pushes on rates as well. When inflation is low, rates trend lower. When inflation picks up, so do fixed mortgage rates. The secondary market where investors buy mortgage-backed securities plays a role. Most lenders bundle the mortgages they underwrite and sell them in the secondary marketplace to investors. When investor demand is high, mortgage rates trend a little lower. When investors aren’t buying, rates may rise to attract buyers.
The Federal Reserve Bank
What does the Federal Reserve actually do?
The Federal Reserve sets borrowing costs for shorter-term loans in the U.S. by moving its federal funds rate. The Fed sets the federal fund rate. This is an interest rate applied to money that banks and other depository institutions lend to each other overnight.
For the last 22 months, the Fed kept this rate set near zero. The rate governs how much banks pay each other in interest to borrow funds from their reserves kept at the Fed on an overnight basis. Mortgages, on the other hand, track the 10-year Treasury rate – currently at 1.68%.
Changes to the federal funds rate might or might not move the rate on the 10-year Treasury, which are bonds issued by the government that mature in a decade. Though a Fed rate cut doesn’t directly push down yields on the 10-year, it can lead to the same outcome. Investors worried about the economy after a rate cut might flock to the 10-year Treasury, considered a safe-haven asset, pushing down yields.
The Fed also influences mortgage rates through monetary policy, such as when it buys or sells debt securities in the marketplace. Early in the pandemic, there was severe disruption in the Treasury market, making the cost of borrowing money more expensive than the Fed wanted it to be. In response, the Federal Reserve announced it would buy billions of dollars in Treasuries and mortgage-backed securities, or MBS. The move was to support the flow of credit, which helped push mortgage rates to record lows. They have said they will begin tapering their purchases which is why many are thinking mortgage rates will rise.
What Fed rate decisions mean for mortgages
The fed funds rate affects short-term loans, such as credit card debt and adjustable-rate mortgages, which, unlike conventional fixed-rate mortgages, have a floating interest rate that goes up and down with the market on a monthly basis. Long-term rates for fixed-rate mortgages are generally not affected by changes in the federal funds rate.
If the central bank wanted to reduce rates again to stimulate the economy, it would have to push rates into negative territory, a move that the Fed chairman Jerome Powell has said is not being contemplated.
What to consider if you are shopping for a mortgage
When you’re shopping for a mortgage, compare interest rates and APR, which is the total cost of the mortgage. Some lenders might advertise low-interest rates but offset them with high fees/points, which are reflected in the APR.
Be sure to look at points and fees. A ‘no cost, no fee’ loan will actually cost $1500-$2000. Although there may be no points or broker fees, there are still charges including the cost of the Title Company and the appraisal, which are usually the largest line items. Pre-paid items like property taxes and insurance can also be included in the costs – you pay now, but get a break later.
If you have a relationship with a lender, bank, or credit union, find out what interest rate or customer discount you might qualify for. Often, lenders will work with customers to give them a better deal than they might otherwise get at another place.
Mortgage rates are at historic lows, so while you should pay attention to the Fed and the economy, your best move if you need a property loan is to get a rate that suits your budget and goals rather than wait for lower rates.