Fed to cut bond purchases, increasing pressure on mortgage rates
During the deadliest days of the coronavirus pandemic, the Federal Reserve cut interest rates to zero and began buying Treasury bonds and mortgage-backed securities at a rate of $ 120 billion each. month. While the Fed does not directly dictate mortgage rates, both of these strategies played a role in dropping mortgage rates to all-time highs in 2020 and early 2021.
The Fed’s actions have also helped fuel inflation, and that’s part of the reason the Federal Reserve’s Open Markets Committee announced on Wednesday that it would slow – or “decrease” – its pace of growth. purchase of bonds of $ 15 billion per month in November and December. The news broke during the Fed’s November meeting.
“With progress in immunization and strong political support, economic activity and employment indicators continued to strengthen,” the Fed said in A declaration. “The sectors hardest hit by the pandemic have improved in recent months, but the summer spike in COVID-19 cases has slowed their recovery. “
The move was hardly a surprise. The Fed hinted at the change in September. With inflation accelerating, market watchers expected the central bank to pull back from bond purchases.
Mortgage rates should rise gradually, not sharply
The mortgage market interpreted the September Fed meeting 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. However, rates have generally held near that level, standing at 3.2% this week.
Mortgage rates have given a lot of pretense in recent months. They hit an all-time low of 2.93 percent in the January Bankrate survey, climbed to 3.34 percent in March, then fell to 3 percent in August. In this case, by telegraphing the Fed’s decision six weeks in advance, the central bank gave mortgage investors and lenders time to adjust to a new reality.
“The market already appears to have incorporated a slowdown in Fed asset purchases,” said Lynn Reaser, chief economist at Point Loma University in San Diego.
In other words, mortgage rates are unlikely to skyrocket as a result of the cut. However, the Fed’s change in stance paves the way for a gradual rise in rates. The Mortgage Bankers Association, for example, expects the average rate on a 30-year mortgage to reach 3.5% by mid-2022 and 4% by the end of 2022.
“As the actions of the Fed were anticipated, this announcement will have no impact our latest forecasts for mortgage rates and mortgage arrangements, ”said Mike Fratantoni, chief economist for the Mortgage Bankers Association, in a statement. “We expect 30-year mortgage rates to drop from 3.2% today to around 4% by the end of 2022.”
The Fed’s “cone” defined
When the coronavirus pandemic cratered the US economy in March 2020, the Fed reacted forcefully. Most mortgages issued in the United States are pooled 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 came as part of an aggressive stimulus package designed to keep the economy from entering the kind of deep freeze that made the Great Recession a task. so painful. 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 has led to calls for the Fed to stop stimulating the economy at this point.
At its September 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 to refinance your mortgage
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 payments, shortening your loan term, 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.