Inflation Pushes Mortgage Rates Up to 3.85%. Professionals Alert Borrowers Not to Panic

  • According to Freddie Mac, the average 30-year fixed mortgage rate increased to 3.85 percent this week, the highest level since March 2020.
  • Experts believe that inflation, which continues to be high (the Bureau of Labor Statistics said Thursday that it was 7.5 percent year-over-year in January, the highest level since 1982), is the most significant factor.
  • High inflation may prompt the Federal Reserve to adopt policies that would boost costs for lenders. However, some of those increases are likely already included in the increased mortgage rates we’ve seen in recent weeks and months.
  • Even while mortgage rates have climbed to levels not seen since the beginning of 2020, they remain very cheap compared to historical levels of the market.
  • Inflation continues to reach levels not seen in more than 40 years, and mortgage rates are increasing with the inflation rate.

The 30-year fixed-rate average jumped to 3.85 percent, the highest since March 2020. The most recent Bureau of Labor Statistics numbers released on Thursday indicated year-over-year inflation of 7.5 percent in the first month of the year 2019. This is the highest level in more than 40 years.

Rob Cook, Discover Home Loans’ vice president of marketing, digital, and analytics, summarises the situation as follows: “It’s one word: inflation.”

Suppose inflation continues to rise at its current levels. In that case, it will force the Federal Reserve to increase its benchmark short-term interest rate, raising costs for lenders, who would pass those costs on to borrowers in the form of higher interest rates, according to Cook.

According to Shashank Shekhar, founder and CEO of InstaMortgage, the mortgage markets have most certainly already factored in some of the anticipated rises due to Fed actions.

According to him, “If we get lower inflation numbers, and if there is a hint that we may not see four rate rises this year, that might be beneficial to mortgage rates.”

Another important cause of inflation is the level of employment. The Bureau of Labor Statistics (BLS) revealed that the economy created 467,000 jobs in January, bringing the unemployment rate down to 4%. Shekhar claims that this was not anticipated after the economic disruptions caused by the epidemic.

“In terms of news that has an influence on mortgage rates over the previous three months, we haven’t gotten much of a break,” Shekhar claims.

While interest rates have risen significantly in recent months, they are still not very high when seen in a larger context. Borrowers should not be alarmed, he advises. “Historically, interest rates have been quite low.”

Mortgage Rate Forecasts for February 2022 

Mortgage experts told us that they anticipated mortgage rates to continue to rise near 4 percent in February, although with some volatility. Week to week, they were able to bounce up and down with abandon.

Nonetheless, according to Ali Wolf, chief economist at Zonda, California-based analytics and consulting business specializing in housing, they will not normally move as quickly during the year as they did in the first few weeks. “We are not anticipating a straight-line increase in mortgage rates,” she said to us.

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When the Federal Reserve begins hiking interest rates, which is likely to occur in March, it will consider the financial system’s entire health, which includes the state of the housing market, according to Mark Vitner, a senior economist at Wells Fargo.

“They don’t want to cause turbulence in the financial markets in the name of getting inflation down,” says the Fed.

The Highs and Lows of the Intermediate 30-Year Fixed Mortgage Rate

Check out how current mortgage rates compare to where they’ve been over the previous several years, as well as the rate of inflation and national house prices for each year in the chart below.

The 30-year fixed rate of 3.85 percent this week is the highest since before the pandemic, but it is on a level with rates from last year, which was still a strong year for mortgage rates overall.

What Other Mortgage Industry Data Is Offering 

According to a similar poll conducted by Freddie Mac, the average 30-year fixed-rate hold increased by 14 basis points to 3.69 percent, representing a significant increase. Since January 2020, the Freddie Mac poll hasn’t had an average that high in any month.

Freddie Mac is a government-funded organization that buys mortgages on the secondary market in the mortgage industry.

Others, such as the Bankrate poll mentioned in this article, have used a different survey approach and collected data over a longer period. While various mortgage rate averages will differ, they will follow a similar pattern over time.

What the Latest Mortgage Rates Suggest for New Homebuyers  

Rising interest rates might harm your purchasing power when looking for a house. Shekhar advises customers to double-check the preapproval letter they received from a lender, noting that they are generally for a certain payment amount rather than a specific loan amount.

If interest rates rise quickly, as they have recently, he advises that borrowers return to their loan officer to verify the preapproval letter.

Shekhar claims that housing prices continue to rise, producing a “double whammy” for homeowners. That does not always imply a decrease in the number of purchasers. “Increasing interest rates might sometimes attract more buyers into the market rather than the other way around,” he explains.

“They believe that since interest rates are increasing, we should purchase sooner rather than later.”

Cook advises prospective buyers to keep a close watch on the amount of money they could have to pay each month. 

“Borrowers should review their financial situation and reevaluate their estimations about the amount of housing they can afford.” Enter your estimations into the mortgage calculator to see what your payment would look like.

When deciding whether to buy a property, avoid letting interest rates significantly impact. It is possible that waiting for prices to decline will be in vain since rates remain around record lows.

Avoid attempting to time the market to get a higher interest rate; doing so is “a mug’s game,” according to Tendayi Kapfidze, head of economic research at U.S. Bank.

What the Current Mortgage Rates Mean for Existing Homeowners 

It may still be advantageous to refinance your current mortgage despite increasing interest rates. It’s possible that if you didn’t refinance over the previous several years, you’d be stuck with a loan with a rate that’s substantially higher than the near-4 percent rates that are now available on the market.

Then refinancing would be a good idea, particularly if you can get a rate of at least 0.75 percent lower than your current one.

Shekhar points out that this isn’t the only circumstance in which refinancing makes sense. According to him, if refinancing would enable you to avoid paying FHA mortgage insurance, you should seriously consider doing so, particularly in light of the recent increase in property prices.

You may also want to consider switching from an adjustable-rate mortgage to a fixed-rate mortgage to lock in a low-interest rate. Cash-out refinancing may be used to pay off faster higher-interest debt, such as credit card debt.