The Federal Reserve stops hiking interest rates. Will mortgage rates go down?
Financial markets don’t always follow the direction that experts say they will. Mortgage interest rates are no exception — and they are now heading in a direction that wasn’t predicted for 2019: down.
Borrowers getting better rates on their mortgages have the Federal Reserve to thank. In December 2018, the Federal Reserve appeared ready to raise its key interest rate twice over the course of the following year. At the time, the Fed was projecting a growth rate of about 2.3% for the U.S. economy, and felt the rate hikes would be needed to keep inflation in check.
But in a reversal, the Federal Reserve indicated at its March meeting that the economy had begun to slow down, and they would be patient with the timing of future rate hikes — effectively pausing any further rate hikes for the year.
The Fed’s decision to pause rate hikes and reduce the outlook for growth was all the bond market needed to rally, driving yields down to levels not seen since December 2017. Mortgage rates have already benefited from this news, dropping to the lowest levels of the past year.
But the Fed didn’t finish their announcements there: the Fed also explained its new approach to something called balance sheet normalization. This policy goes all the way back to the financial crisis and the slow economic recovery afterward.
To help the economy recover from the financial crisis, the Federal Reserve grew its balance sheet by purchasing treasuries and mortgages to keep interest rates low in a process known as quantitative easing, said Tendayi Kapfidze, chief economist at LendingTree. Today, even though the crisis is over, the Federal Reserve still has trillions of dollars of treasury and mortgage holdings on its balance sheet, and it is trying to determine the best way to reduce these holdings.
If they reduce them too fast, the fear is that rates will go up. The most recent Federal Reserve announcement indicated they would reduce them at a slower pace for the next several months, which is adding fuel to the drop in interest rates.
Understanding the Fed’s decision and how it affects mortgage rates
To understand the Fed balance sheet, picture the Federal Reserve as a rich uncle who’s really good with money. In this scenario, the financial markets during the housing crisis are a problem child nephew who doesn’t manage his money very well, and asks his uncle to bail him out by taking over all of the debt he racked up and mismanaged — in reality, this was trillions of dollars of mortgage debt secured by homes all over the country.
That’s basically what the Fed did when it came to the mortgage market. They came in and put a lot of mortgage debt on their books to clean up the mess. That kept the financial markets from collapsing and helped the economy recover.
The only problem is that 10 years later, the nephew has gotten used to his uncle managing the money. So any time the uncle says it’s time to put the money back in the hands of his nephew, the nephew has a temper tantrum and says he’ll have to raise prices if the uncle puts it all back in his account.
If the Fed keeps that debt on the books longer, the financial markets can breathe a sigh of relief and rates can temporarily come down, which is exactly what is happening right now.
What this all means if you’re getting a mortgage
Mortgage rates are lower than they were expected to be in 2019, and may be headed even lower. Or if not lower, they are likely to at least hold at these lower levels based on the actions of the Fed this month.
How low will they go?
Guessing how low rates will go is like trying to predict exactly how high a stock will go — there are so many moving parts that even economists can find their predictions upended by an unexpected reversal of economic fortune.
At the end of 2019, there were indicators that mortgage rates would get as high as 5.5% for 30-year fixed conventional loans, but the most recent Fed meeting has shifted the consensus lower — at least for now.
The simple truth is that one economic report or global financial move could push rates back up instantly, which means this window could close as quickly as it’s opened. The better question is, how does this affect your decision to buy or refinance a home right now?
How much more affordable is a home purchase with lower rates?
Many experts were predicting 5% rates, so if you were calculating your projected payment based on a 5% rate back in January, it’s time to rework those figures. According to the Freddie Mac rate survey ending March 21, the 30-year fixed rate mortgage is at 4.28%.
If you are looking to borrow $300,000, your estimated principal and interest payment just dropped from $1,610.46 per month at 5% to $1,481.09 at 4.28% — a savings of $129.37 per month or $1,552.44 per year.
These lower rates may help an already improving homebuying attitude. About 65% of people believe that now is a good time to buy a home, according to a survey by the National Association of Realtors in the first quarter of 2019. With rates dropping, these numbers may increase as the lower payments make new home purchases more affordable.
There may be more sellers deciding to list their homes for sale, especially if their reason for holding off before was the higher projected interest rates that would make a new home purchase unaffordable for them. More homes for sale is good news for buyers as well, as it means there will be more choices available for their home purchase.
4 calculations to determine if refinancing make sense now
There are four numbers you’ll need to determine if a refinance makes sense right now.
- Your estimated appraised value. Give your friendly neighborhood real estate agent a call to find out where values are. Even if you purchased your home three to six months ago, it’s still possible the values have gone up enough to help with the pricing on your interest rate. The more equity you have, the better your potential rate will be, or the lower your mortgage insurance premium will be if you have some extra equity.
- Where are rates right now. Using a rate comparison tool, you can input some figures and get some preliminary offers to see where rates are based on your current FICO, home value, and projected loan amount.
- Fees and other costs. Get a few fee estimates to figure out where the fees will be. For a purchase or refinance, your fees can run from 1% to 3% of your loan amount, depending on the size of your current loan balance.
- Your break-even point. Divide the closing costs by your monthly savings.
Mortgage refinance windows can close just as quickly as they open. If you crunch your numbers and the savings help you accomplish a financial goal, or the payment on a new home is more comfortable, then be prepared to move quickly.
Have your loan paperwork ready to submit once you’ve chosen a lender, and request your lock in as soon as you can.