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Mortgage rates have trended down this week following a speech Federal Reserve Chair Jerome Powell gave at the Brookings Institution on Wednesday.
In his speech, Powell talked about the current economic conditions and how the Fed is thinking about inflation as it prepares to head into its mid-December meeting.
Powell reiterated what he’s been saying for months, which is that inflation has been incredibly stubborn and that the Fed will need more than a single month of lower inflation data before it considers changing course.
The central bank has hiked the federal funds rate by 75 basis points at each of its last four meetings, though markets largely expect a smaller, 50-point hike at its next meeting. Powell hinted that this could be the case, provided that the latest economic data continues to show inflation coming down.
As the Fed has aggressively hiked rates this year, mortgage rates have also been pushed up. If the Fed is able to slow its pace of increases, mortgage rates may hover near their current levels before starting to come down in the new year. But it all depends on whether inflation continues to slow.
Additionally, even if the Fed opts for smaller increases in December and throughout early 2023, Powell noted that it may be necessary to keep rates high for “some time” in order to get inflation down to the Fed’s target rate of 2%. Because of this, borrowers shouldn’t expect mortgage rates to drop dramatically any time soon.
“Despite some promising developments, we have a long way to go in restoring price stability,” Powell said in his speech.
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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 6.5% 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 slowing 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.
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 0.7% increase in 2023 and a 0.1% decrease 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.
Fixed-rate vs. adjustable-rate mortgage pros and cons
Fixed-rate mortgages lock in your rate for the entire life of your loan. Adjustable-rate mortgages lock in your rate for the first few years, then your rate goes up or down periodically.
ARMs typically start with lower rates than fixed-rate mortgages, but ARM rates can go up once your initial introductory period is over. If you plan on moving or refinancing before the rate adjusts, an ARM could be a good deal. But keep in mind that a change in circumstances could prevent you from doing these things, so it’s a good idea to think about whether your budget could handle a higher monthly payment.
Fixed-rate mortgage are a good choice for borrowers who want stability, since your monthly principal and interest payments won’t change throughout the life of the loan (though your mortgage payment could increase if your taxes or insurance go up).
But in exchange for this stability, you’ll take on a higher rate. This might seem like a bad deal right now, but if rates increase further in a few years, you might be glad to have a rate locked in. And if rates trend down, you may be able to refinance to snag a lower rate
How does an adjustable-rate mortgage work?
ARMs start with an introductory period where your rate will remain fixed for a certain period of time. Once that period is up, it will begin to adjust periodically — typically once per year or once every six months.
How much your rate will change depends on the index that the ARM uses and the margin set by the lender. Lenders choose the index that their ARMs use, and this rate can trend up or down depending on current market conditions.
The margin is the amount of interest a lender charges on top of the index. You should shop around with multiple lenders to see which one offers the lowest margin.
ARMs also come with limits on how much they can change and how high they can go. For example, an ARM might be limited to a 2% increase or decrease every time it adjusts, with a maximum rate of 8%.
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