Mortgage rates might surprise us this week
Borrowers and experts viewed this week's Federal Reserve meeting as a key moment for mortgage rates.
The Fed is expected to announce on Wednesday that it will “shorten” its Covid-era bond purchase program that has kept mortgage rates low for the past year and a half.
In theory, this means that prices should go up. But there is a catch.
We have known about the Fed's plans for some time. So the announcement does not come as a surprise.
And that, contrary to popular belief, may not mean a large, if any, rate hike after the Federal Reserve meeting.
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Will the Fed raise rates this week?
In the simplest sense, no. The Federal Reserve does not set mortgage rates and has no power to raise or lower them at will.
However, the Fed has two levers that it can use to influence mortgage rates:
1. The Federal Funds Rate
The federal funds rate is the interest rate at which banks lend one another overnight. Fixed mortgage rates are not based on or tied to the Fed Funds Rate in any way – although they can be indirectly influenced by it. So if the Fed raises its key rate, mortgage rates could just pull along.
However, the Federal Reserve has indicated that it is unlikely to raise its policy rate until 2022 at the earliest. So experts don't expect any big news on the interest rate front at this week's Fed meeting.
2. The Fed's bond purchase program
In contrast to the key interest rate, the Federal Reserve's bond purchase program has a direct impact on the development of mortgage rates.
Since the pandemic began, the Federal Reserve has been buying $ 40 billion a month in mortgage-backed securities (MBS). MBS are a type of bond that helps determine mortgage interest rates.
By keeping demand for MBS artificially high, the Fed has forced mortgage rates to stay low during the Covid pandemic.
But now that the economy is on the recovery path, the Fed has decided it is time to pull this stimulus package back. This process is known as "tapering" – a word you've probably heard if you've been tracking mortgage rates over the past several months.
Why we may not see a large rate hike after the Fed meeting
Most rate watchers expect a formal announcement of when the Fed will begin tapering its bond-buying program after this week's Fed meeting.
In theory, an official start of tapering should result in higher rates for home buyers and homeowners.
It did so when the Fed ended a similar program in 2013.
But the Federal Reserve was careful this time.
Fed chief Jerome Powell has been open about the central bank's plan to withdraw stimulus measures before the end of the year. And that means that this week's tapering announcement – if it happens – won't come as a surprise.
Remember that mortgage rates are determined by the investors. And investors often trade based on what they expect from the market.
So there's a good chance the Fed's tapering plans are already factored into today's mortgage rates. In fact, average rates rose significantly in the weeks leading up to the Federal Reserve meeting:
Source: Freddie Mac
Therefore, after the meeting, we may not see a huge increase as many experts have predicted.
Don't be complacent – higher prices are yet to come
What does this all mean if you're a homebuyer or a homeowner looking to refinance?
First, it means don't panic that interest rates will skyrocket after this week's Fed meeting. At this point in time, a huge rise in interest rates like the one among borrowers in 2013 seems unlikely.
However, now is not the time to get complacent.
Rising rates are expected for 2021 and 2022. And there are two big reasons:
inflation – Higher inflation usually leads to higher interest rates. And annual US inflation was at a 13-year high in SeptemberEconomic recovery and growth – As Covid cases continue to decline and the economy continues to improve, it seems inevitable that rates will rise. Remember that a stronger economy usually leads to higher interest rates for mortgage borrowers
We might see a slow, steady rate hike rather than a sharp rise. But most experts agree that sooner or later there will be higher interest rates.
So if you can get a course banned anytime soon, this is a good time.
During the pandemic era, “record low” rates could be gone forever. But there are still great offers for qualified borrowers too.
Make sure that you shop around to find the best lenders and interest rates for your situation. This can save you thousands – and in today's rising interest environment, finding the best deal is more important than ever.
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