If the Fed starts to “crumble” mortgage rates could go up. Here’s what to do now.

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At its last meeting, the Federal Reserve signaled that it was on the verge of reducing the amount of bonds it purchases each month and that it may also start raising interest rates as early as next year.

The mortgage market has interpreted this news as the beginning of the end of super cheap mortgage rates. In the week following the Fed’s Sept. 22 meeting, the average rate on a 30-year mortgage jumped 12 basis points to 3.17%, according to Bankrate’s national survey of lenders.

Mortgage rates have given a lot of pretense in recent months. They hit an all-time low of 2.93% in January, climbed to 3.34% in March, then fell to 3% in August.

Will this latest rate hike last? No one knows this answer for sure. But housing economists and market watchers generally agree that a variety of factors – including inflation, the economic recovery, and the pace of Fed bond buying – are lining up to push rates up. rise.

And for the millions of homeowners who have yet to lock in historically low interest rates through refinancing, that money-saving opportunity may soon disappear.

“Rates are more likely to go up than to go down,” says Isaac Hacamo, assistant professor of finance at the Kelley School of Business at Indiana University. “If you haven’t refinanced in the past few years, I would now.”

The Fed’s “cone” defined

When the coronavirus pandemic cratered the US economy in March 2020, the Fed reacted forcefully. The central bank lowered its key federal funds rate to near zero. The Fed has also pumped money into the economy by purchasing mortgage-backed securities and other bonds to the tune of $ 120 billion per month.

To explain this a bit, most mortgages issued in the United States are grouped together as mortgage backed securities and then sold to investors. The Fed stepped in as the buyer of these securities, a way to ensure that credit continues to flow at low interest rates.

The bond buying and other emergency measures were part of an aggressive stimulus package designed to keep the economy from entering the kind of deep freeze that made the Great Recession such a painful task. After this recession, the first slowdown in a decade, the US economy quickly recovered much of the lost ground.

Labor markets have rebounded. And some say the federal response has worked a little too well – stocks have skyrocketed and house prices have hit record highs. Inflation, long absent from the US economy, is back. This led to asking the Fed to stop stimulating the economy so much.

“The problem with the housing market is not that it needs support. It’s because he values ​​Americans, ”Mohammed El-Erian, chief economic adviser at Allianz SE, told Bloomberg TV. “Americans can no longer afford what is happening in the housing market. “

At last month’s meeting, the Fed said all of these factors mean it’s time for the central bank to stop flooding the economy with money by buying bonds.

“If progress continues overall as planned, the committee believes that moderation in the pace of asset purchases may soon be warranted,” the Federal Open Market Committee said in its post-meeting statement.

Economists summarize this winding mouthful of verbiage as the “cone.”

How taper could affect mortgage rates

Mike Fratantoni, chief economist for the Mortgage Bankers Association, said the Fed’s September announcement practically committed the central bank to announcing a cut at its next meeting in early November.

“To paraphrase Chekov, if at the September meeting the Fed presents a reduction plan, it has to use it in November,” Fratantoni said. “There would have to be a significant negative surprise in the incoming data for them to delay.”

However, even if the Fed continues and slows its pace of bond buying, Fratantoni does not expect mortgage rates to rise sharply.

“The impending reduction and change in the outlook for monetary policy is likely to contribute to a modest increase in mortgage rates over the medium term,” he said.

Lynn Reaser, chief economist at Point Loma Nazarene University, also predicts a steady rise in mortgage rates rather than a steep rise. Indeed, it is possible that the most dramatic movement has already taken place.

“The market appears to have already incorporated a slowdown in Fed asset purchases,” Reaser said. “The Fed will likely only announce a small adjustment in the amount of securities it buys each month, from $ 120 billion to $ 110 billion or $ 105 billion. The market will already have anticipated the announcement – and may even ‘welcome as a step to stem inflation. “

How to refinance your mortgage

We’ll leave it to 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. This could be lowering your monthly payment, shortening the term of your loan, or withdrawing equity for home repairs or to pay off higher interest rate debt. Maybe you want to roll your HELOC into a refi.
  • 2nd step: Check your credit score. You will need to qualify for refinancing just like you would need to get approved for your original home loan. The higher your credit score, the better the refinancing rates lenders will offer you, and the better your chances of underwriters to approve your loan.
  • Step 3: Determine the equity in your home. The equity in your home is the value of your home that is more than what you owe your mortgage lender. To find this number, check your mortgage statement to see your current balance. Then check out online home search sites or have a real estate agent perform a scan to find your home’s current estimated value. The equity in your home is the difference between the two. For example, if you owe $ 250,000 on your home and it is worth $ 325,000, your home equity is $ 75,000.
  • Step 4: Shop around for several mortgage lenders. Getting quotes from multiple mortgage lenders can save you thousands of dollars. Once you’ve chosen a lender, discuss the best time to lock in your rate so you don’t have to worry about the rate going up before your loan closes.
  • Step 5: Put your papers in order. Gather recent pay stubs, federal income tax returns, bank statements, and whatever else your mortgage lender asks for. Your lender will also look at your credit and equity, so disclose your assets and liabilities up front.

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