What the Federal Reserve’s Latest Move Means for Your Mortgage Rate Next Year

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Federal Reserve Chairman Jerome Powell announced Wednesday the Fed will slow down its bond purchasing program to combat inflation. These policy changes are expected to cause rising mortgage rates next year.
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A major announcement from the Federal Reserve this week is another big indication that mortgage rates are going to rise in 2022, according to experts. 

Federal Reserve spokesperson and chairman Jerome Powell, announced Wednesday the Fed will slow down its bond purchasing program. “With elevated inflation pressures and a rapidly strengthening labor market, the economy no longer needs increasing amounts of policy support,” said Powell. 

Powell acknowledged the forecast and policies could evolve based on unexpected changes in the impact of Omicron or other coronavirus variants. “The rise in COVID cases in recent weeks, along with the emergence of the Omicron variant, pose risks to the outlook.” 

This latest update from the Fed supports what experts have been saying all year: that mortgage rates will likely continue to increase as the economy recovers from the pandemic. “With the Fed’s recent announcement … there’s a strong expectation that rates, including mortgage rates, will rise next year,” says Robert Heck, vice president of mortgage at online broker Morty.  

The 30-year fixed mortgage rate will increase to 3.5% next year, said Lawrence Yun, NAR chief economist and senior vice president of research. Yun’s prediction came during the unveiling of the consensus forecast at yesterday’s National Association of Realtors (NAR) year-end Real Estate Forecast Summit

The Federal Reserve has a lot of influence on the mortgage rate you’ll get if you buy or refinance a home. Here’s what the Fed does, why it matters for the mortgage rate market, and why you shouldn’t necessarily let it influence your plans to buy or refinance next year. 

What Is the Federal Reserve and What Do They Do? 

The Federal Reserve, often referred to as “the Fed,” acts as the central bank for the United States. Rather than being one bank, however, it is actually a system of banks. One of the biggest things the Federal Reserve does is manage the monetary policy of the nation. The stated goals of the Federal Reserve are to:

  • Promote maximum employment
  • Moderate long-term interest rates in the U.S. economy
  • Encourage stable prices
  • Monitor the impact of financial institutions on the U.S. economy
  • Offer payment and settlement services to banks in order to promote liquidity

The Federal Reserve has different tools to accomplish these goals. It sets its own benchmark rates related to what it charges financial institutions. On top of that, the Federal Reserve has an impact by purchasing different assets, especially Treasuries, as a way to influence prices and rates.

Pro Tip

Don’t rely on Fed rates to make decisions about your mortgage. Instead, consider your current situation and budget when home buying.

“Outside the bond-buying programs, just generally increasing their own rates, and providing guidance where future rates should be, the Fed can impact the Treasury bond rates,” Heck says. “Expectations set by the Fed can also impact how things work in the future.”

As a result, Heck points out, what the Federal Reserve does can ripple through the markets, impacting various things from the cost of goods and services to the interest rate you pay on loans like credit cards and mortgages.

How the Federal Reserve’s Decisions Impact Mortgage Rates

The Federal Reserve’s interest rate announcements don’t directly affect mortgage rates, says Shannon McLay, founder of the Financial Gym, a financial planning and wellness service. It’s more of an indirect influence. 

What the Fed says about inflation and the overall health of the U.S. economy can impact longer-term rates for mortgages.” says McLay.

Mortgage rates can be influenced by a secondary market too. “There is a futures market where lenders and servicers who are on that primary origination side can use that to price mortgages. These are connected to Treasuries,” Heck says. “So the Federal Reserve can buy Treasuries and mortgage-backed securities (MBS), and that can impact the market, and in turn impact mortgage rates.”

One of the reasons the market has remained in a relatively low-rate environment, even with recent inflation, is due to the fact that the Federal Reserve has continued to keep its benchmark rate low. Concerns about the continued impact of the coronavirus pandemic have prompted the Fed to act with caution, as outlined in a November press release issued by the Fed. However, with inflation on the rise, and the Fed committed to trying to keep it to 2%, there is speculation that interest rates will rise in 2022.

What To Consider When Shopping for a Mortgage

For homebuyers, Heck says it’s more important to focus on your own fundamentals rather than timing your plans and purchases based on Fed announcements or other economic trends. 

“Trying to lock in a mortgage rate based on Fed meetings probably isn’t useful,” Heck says. “Instead, prospective homebuyers should focus more on the personal finance aspect of the transaction. Mortgage rates aren’t typically going to change dramatically in these one-off events.”

Rather than focusing on what the Federal Reserve is doing, take a look at what you can more directly control in your own finances.

Your Monthly Budget

First, make sure you can afford to buy a home to begin with, says McLay. Rather than getting hung up on current mortgage rates, she suggests using a mortgage calculator and totaling up the cost of the mortgage payment, taxes and insurance, as well as estimating maintenance and repair costs.

“If you’re looking to buy a home that will cost $2,500 per month, but you’re currently living someplace and paying $1,800 per month, we would advise you to set up an automatic savings transfer for $700 per month to make sure that the additional home expense does not cause a dramatic hit to your monthly budget,” McLay says. “If you’re able to make that transfer for a number of months without getting into credit card or cash crunches, then you know you can afford the home.”

Stick to a Homebuying Budget

Not only can the exercise of creating a realistic homebuying budget help you decide if you’re ready to handle the costs of home ownership, but it can also provide you with a way to gauge how big your mortgage should be. 

Decide how much you can pay for a home, and stick to that budget. Sometimes borrowers get approved for a loan amount that doesn’t make sense for your budget. Make sure to set a budget you’re comfortable with leaving room for other expenses, saving, investing, and the hidden costs to maintain a home. 

A real estate agent might try to get you to buy a little bit more, but you could find yourself in worse financial shape if you stretch your budget to make room for a larger mortgage.

Shop Around for the Best Mortgage for Your Needs

While paying attention to the Fed and making decisions based on what it does isn’t the best way to decide when to buy a home, you still want the best possible mortgage rate.

“If you are looking for a mortgage, we highly recommend shopping for at least three rates and comparing all of the line items of the proposals from the lending institutions,” McLay says. Pay attention to the closing costs and lender fees. These costs are reflected in the annual percentage rate (APRs), which account for the lender’s costs rolled into the mortgage rate. “I’ve seen clients get mortgage approvals for the same 30-year interest rate but the APRs were significantly different. It could cost you $2,000-$10,000 more in lender costs without realizing it,” says McLay. 

Even if you don’t get the absolute lowest rate, you could still potentially take advantage of lower rates in the future through refinancing, McLay says. She recommends getting the best rate you can today, and then positioning yourself so you can take advantage of future developments.

“There’s a chance that rates could get better or worse, and it’s difficult to predict even for experts,” Heck says. “So try to stay focused on affordability and make the right financial choice for you.”