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The news that inflation is slowing caused 30-year fixed rates to drop more than 50 basis points between Thursday and Friday. Rates remain relatively low today. The last time rates were this low was in early October.
On Thursday, the Bureau of Labor Statistics released Consumer Price Index data for October, which showed that inflation slowed more than expected last month, dropping to an annual rate of 7.7% — 0.5 points below September’s rate.
The CPI release made a big impact: stocks soared, 10-year Treasury yields dropped, and the likelihood of a smaller, 50-basis-point hike from the Federal Reserve in December hit 85.4%, up from last week’s 61.5%, according to the CME FedWatch Tool.
Slowing price growth is good news for mortgage borrowers. The Fed has stated that it’s committed to raising the federal funds rate until inflation comes down to its target annual rate of 2%, even if that means pushing the economy into a recession. Because inflation appears to finally be responding to the central bank’s efforts, the Fed may be able to ease up on future rate hikes. This means mortgage rates may not increase further this year, and they’ll likely start to drop in 2023.
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Use our free mortgage calculator to see how today’s mortgage rates will affect your monthly and long-term payments.
By plugging in different term lengths and interest rates, you’ll see how your monthly payment could change.
Mortgage rate projection for 2023
Mortgage rates started ticking up from historic lows in the second half of 2021 and have increased over three percentage points so far in 2022. They’ll likely remain near their current levels for the remainder of 2022.
But many forecasts expect rates to begin to fall next year. In their latest forecast, Fannie Mae researchers predicted that rates are currently peaking, and that 30-year fixed rates will trend down to 6.2% by the end of 2023.
The Mortgage Bankers Association also noted that a recession in the first half of 2023 could cause rates to fall even faster. It currently estimates that there’s a 50% likelihood that a mild recession will materialize in the next year.
Whether mortgage rates will drop in 2023 hinges on if the Federal Reserve can get inflation under control.
In the last 12 months, the Consumer Price Index rose by 7.7%. This is a slowdown compared to the previous month’s numbers, which means the Fed may be able to start easing up on its pace of hikes to the federal funds rate.
As inflation slows, mortgage rates will likely start to fall as well. If the Fed acts too aggressively and engineers a recession, mortgage rates could fall further than what current forecasts expect. But rates probably won’t drop to the historic lows borrowers enjoyed throughout the past couple of years.
Should I get a HELOC? Pros and cons
If you’re looking to tap into your home’s equity, a HELOC might be the best way to do so right now. Unlike a cash-out refinance, you won’t have to get a whole new mortgage with a new interest rate, and you’ll likely get a better rate than you would with a home equity loan.
But HELOCs don’t always make sense. It’s important to consider the pros and cons.
HELOC pros
Only pay interest on what you borrowTypically have lower rates than alternatives, including home equity loans, personal loans, and credit cardsIf you have a lot of equity, you could potentially borrow more than you could get with a personal loan
HELOC cons
Rates are variable, meaning your monthly payments could go upTaking equity out of your home can be risky if property values decline or you default on the loanMinimum withdrawal amount may be more than you want to borrow
When will house prices come down?
Home prices are starting to decline, but we likely won’t see huge drops, even if there’s a recession.
The S&P Case-Shiller Home Price Index shows that prices are still up year-over-year, though they fell on a monthly basis in July and August. Fannie Mae researchers expect prices to decline 1.5% in 2023, while the MBA expects a 2.8% increase in 2023 and a 2.1% increase in 2024.
Sky high mortgage rates have pushed many hopeful buyers out of the market, slowing homebuying demand and putting downward pressure on home prices. But rates may start to drop next year, which would remove some of that pressure. The current supply of homes is also historically low, which will likely keep prices from dropping too far.
What happens to house prices in a recession?
House prices usually drop during a recession, but not always. When it does happen, it’s generally because fewer people can afford to purchase homes, and the low demand forces sellers to lower their prices.
How much mortgage can I afford?
A mortgage calculator can help you determine how much you can afford to borrow. Play around with different home prices and down payment amounts to see how much your monthly payment could be, and think about how that fits in with your overall budget.
Typically, experts recommend spending no more than 28% of your gross monthly income on housing expenses. This means your entire monthly mortgage payment, including taxes and insurance, shouldn’t exceed 28% of your pre-tax monthly income.
The lower your rate, the more you’ll be able to borrow, so shop around and get preapproved with multiple mortgage lenders to see who can offer you the best rate. But remember not to borrow more than what your budget can comfortably handle.