The Fed’s new plans could bring a quicker end to cheap mortgage rates
The party’s not over for homeowners looking for refinance savings and homebuyers hoping to land cheap mortgages. But the Federal Reserve may have just announced last call.
On Wednesday, the Fed released projections showing that its policymakers expect to raise interest rates twice during 2023. Just three months ago, in March, the officials indicated rates would be held at their current, historically low levels at least until 2024.
The U.S. central bank says the nation's economic outlook is improving, largely because of the vaccines that have slowed the spread of COVID-19.
“Amid this progress and strong policy support, indicators of economic activity and employment have strengthened,” the Fed said in a statement.
But if the Fed aims to hike rates sooner, that means time could be running out for borrowers to take advantage of today’s historically low mortgage rates.
Fed sees encouraging signs for the US economyShutterstock
The Fed chopped its key interest rate — called the federal funds rate — down to around 0% when the pandemic first started pummeling the economy in March of last year.
Federal Reserve Chairman Jerome Powell has said policymakers won't be comfortable raising the rate until the U.S. achieves "full employment" and a healthy level of inflation that won't hurt consumer spending.
The Fed has set 2% as its inflation goal and says it wants to see that level breached "for some time." Maximum employment is a bit of a nebulous idea, but new economic projections released by the central bank look for average unemployment of 4.5% this year. That’s not exactly rock bottom.
“Lift-off is well into the future,” Powell said during a news conference on Wednesday. "We’re very far from maximum employment, for example, it’s a consideration for the future."
The Fed projects that inflation will average 3.4% in 2021, but the chairman warns that it "could turn out to be higher and more persistent than we expect."
Powell and his colleagues look for inflation to moderate to 2.1% next year and rise slightly to 2.2% in 2023 — which would provide exactly the kind of evidence the Fed needs to start raising interest rates.
The impact for mortgage ratesShutterstock
The Fed doesn't have a direct effect on long-term mortgage rates, but the next-to-nothing federal funds rate has fostered a low-rate environment that has contributed to today's dirt-cheap home lending costs.
Mortgage rates also have been influenced by another Fed strategy. The central bank on Wednesday reaffirmed its commitment to buying $80 billion a month in Treasury bonds, which has helped hold down the interest, or yields, on Treasuries.
"These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses," the Fed says.
Mortgage rates closely track the yield on the 10-year Treasury note. When the 10-year yield dropped last week, so did the average rate on a 30-year fixed-rate mortgage: from 2.99% to 2.96%, according to mortgage giant Freddie Mac.
Once the Fed starts tapering its bond purchases and pushing up the federal funds rate, mortgage rates will feel the pressure.
"Rates jumped half a percent in a 10-day period in March, so they are very fluid," says Corey Burr, senior vice president at TTR Sotheby's Realty in Washington, D.C. "If the economy fully recovers from the pandemic, they will undoubtedly increase."
Score a low mortgage rate while you canShutterstock
With the economic rebound from COVID-19 strong enough to have the Fed adjusting its recovery timelines, it probably won't be long before the low-rate era for homebuyers and homeowners is replaced by a new reality of higher borrowing costs.
If you might soon be in the market for a home loan, start shopping around. With rates below 3%, mortgage technology and data provider Black Knight says there are 14.1 million homeowners who could save an average of $287 a month with a refinance.
Whether you may be buying a home or refinancing, strong credit will help you land a low mortgage rate, so review your credit score. It's very easy today to check your credit score for free. If your credit needs a little TLC, finding out now gives you more time to whip it into shape.
Once it’s time to seek out a lender, never go with the first one you encounter — even if you're promised "the lowest rates." You may be able to do better. Comparing at least five loan offers will help you find what’s really the best mortgage rate for your area and your unique financial situation.
To help tamp down your overall homeownership costs, do some comparison shopping for your homeowners insurance, too. A few minutes spent gathering price quotes could save you hundreds of dollars a year.
Earning some returns in the white-hot stock market also can help make homeownership more affordable. A popular app helps you grow a diversified portfolio merely by investing "spare change" from your everyday purchases.