Did Interest Rates Increase .75% Last Week?

Question: Have you already seen interest rates increase since last week’s announcement that the Federal Reserve is increasing rates by .75%?

Answer: Contrary to popular belief, the news you read about the Federal Reserve increasing interest rates does not directly result in changes to the interest rates you get on your mortgage. The Federal Funds Rate is the rate that large banks charge each other for short-term, overnight loans and is one of the many market factors that influence the interest rate you get on a mortgage.

Fed Rate Up, Mortgage Rates Down

Last week, on Wednesday July 27, the Federal Reserve announced they were increasing the Federal Funds Rate by .75%. Many people I spoke with thought this meant that mortgage rates would immediately or quickly increase by a similar amount, however, the reality was that the average 30yr fixed mortgage rate, per Mortgage News Daily, decreased from 5.54% on Wednesday July 27 to 5.22% on Thursday July 28, one day after the announcement. As of yesterday, MND’s research showed that the average 30yr fixed rate had dropped even more to 5.05%.

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Mortgage Rates Are Market-Driven, Like Stocks

Mortgage rates operate like stocks in that they are constantly (daily) moving up and down as they react to changes in the domestic and global markets. In theory, mortgage rates, like stocks, are supposed to reflect the valuation of all current and future market information to determine the cost of borrowing money each day.

What the Fed Rate Means for Your Mortgage Rate

What does that mean in relation to your mortgage rate and the highly publicized Fed Funds Rate?

The Federal Reserve meets eight times per year to set monetary policy, including making any changes to their target Fed Funds Rate. Prior to those meetings, financial experts are constantly adjusting their expectations of the Federal Reserve’s rate announcements and those expectations are embedded on a daily basis into mortgage borrowing rates, so the most significant rate changes occur when expectations aren’t met or surprising guidance is issued by the Fed during these meetings (keep in mind, this isn’t the only information banks use to determine mortgage rates).

Heading into last week’s announcement, I read that mortgage rates, stocks, and other market instruments were priced with a roughly 80% expectation of a .75% increase in the Fed Funds Rates and a roughly 20% expectation of a 1% increase, so when the announcement was made confirming a .75% increase and guidance was given suggesting the Fed will soon be able to slow their rate increases, market instruments reacted in a mostly positive way, which resulted in mortgage rates decreasing because the outcome was weighted towards expectations for lower future rate increases (.75% instead of 1% and slowing future increases).

The next scheduled Federal Reserve announcement on the Federal Funds Rate is scheduled for September 21, you’ll see mortgage rates react daily based on new economic data on inflation, growth, unemployment, global threats, etc that will all influence how the Federal Reserve responds during their next meeting.

Mortgage Rate Forecasts

There’s one thing I’ve learned over the years about mortgage rate forecasts…they’re always wrong. You can see how much of a difference there is in forecasts from the experts in this recent Forbes article, with expectations for 2022 rates ranging from ~5-7% to a technical version of a shoulder shrug.

With that said, if you’re seeing news about inflation coming under control and we avoid new major global supply chain disruptions, odds are that mortgage rates will gradually come down through the end of the year. However, none of that is guaranteed as we find ourselves in a constant state of global and economic volatility and disruption, factors that generally cause instability and increases in mortgage rates. 

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Ideas for Reducing Your Interest Rate

Question: Are there any good ways to lower my interest rate?

Answer: I probably don’t need to spend time educating you on how high interest rates have gotten
over the last 6 months (they’ve more than doubled in most cases), but we’re now seeing rates in the
upper 5% to mid-6% range on most loans. Unfortunately, the current economic environment makes it
more likely that rates continue to climb and most lenders I speak to tell me they’re expecting rates in
the 7-8% range later this year.

While there isn’t much you can do to change your rate in a significant way, just like you can’t do much
about the price of gas, there are some strategies you can use to help. I spoke with Jake Ryon
(jryon@firsthome.com) of First Home Mortgage about things he recommends to help bring down your
rate.

Consider ARMs (Adjustable Rate Mortgage)
ARMs got a terrible reputation during the housing crisis because many borrowers didn’t understand
the terms of their loan. Some of these options allowed for negative amortization so borrowers opting
for the lowest rate ended up owing more on their loan than when they started. Many of these options,
and the sometimes predatory approach to lending, have been outlawed so the ARMs you see today
are a distant relative of the ARMs of the housing crisis.

What is an ARM?
Simply put, an ARM is a loan with an interest rate that is locked for a set period of time (usually 5, 7,
or 10 years) that can adjust (up or down) after that set period, based on market rates. The rate will
continue to adjust up or down based on market rates with limits on how much a rate can change each
year and throughout the life of the loan.

Why should you consider it?
In the current interest rate environment, you’ll usually see lower interest rates on an ARM than on a
standard 30-year fixed mortgage. The difference can be roughly .5-1%, which is a significant savings
on interest payments.

What about the risk?
The risk of an ARM is that if rates remain high or end up higher at the end of your lock period, your
rate will adjust upwards. The gamble you’re taking (based on historical rate trends, it’s a good bet) is
that rates will drop enough to justify refinancing into a lower 30yr fixed rate before your ARM lock
period expires.

Over the last few years when rates were so low, ARMs didn’t make sense because they were so
close to a 30yr fixed rate (sometimes higher), so you haven’t heard people talk much about their
benefit until more recently when the spread between the two has increased.

Buy Origination Points
In most cases, you can buy “points” on your loan to decrease the interest rate. One point equals 1%
of your loan amount and for a while, you were seeing a reduction of around .25% in rate for a point. In
the current interest rate environment, buying a point may lower your rate by as much as .5-.75%.
Discuss this with your lender up-front so you’ll know if you should budget additional cash to lower
your interest rate. Your lender can also calculate the break-even point on this investment, which is essentially calculating how long you need to be in the loan (own the property) for the money saved in
interest payments to exceed the amount you paid for the point.


Increase Down Payment
Sorry if this seems obvious, but for years when rates were so low, many buyers were choosing to put
less money down, even if they had more funds available, because the cost of borrowing was so low,
they felt they could use the extra cash more effectively in other savings/investment vehicles.

That financial strategy is no longer as attractive and using as much down payment as you can muster
is gaining favor in financial advisory circles. In general, you achieve the best interest rates with a 20-
25% down payment, with little improvement beyond that. However, putting more money down can still
make a lot of financial sense even if it doesn’t lower your rate because the interest payments on
borrowed money are so high now.

There are still plenty of loan options for buyers with less (3-5%) to put down, but those rates have
shot up and carry higher mortgage insurance premiums.

It’s now even more important to get pre-approved and open discussions with a trusted lender at the
beginning of your home search (here’s a link to an article I wrote about picking a good lender). If you
have any questions about finding a lender or want recommendations, don’t hesitate to email me.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me
at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing,
please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N
Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Interest Rate Forecasts and New Loan Limits

Question: What do you expect from mortgage interest rates in 2022?

Answer:

Historically Low Rates

The first thing to understand about mortgage interest rates is that they are market-driven and forecasting comes with the same amount of unpredictability as any other economic/market-based forecasting (GDP, Unemployment, Stocks, etc). So take predictions/forecasts with a grain of salt.

Higher Prices Still “Manageable”

For perspective, the chart above shows the average 30yr fixed rated mortgage in the US since 1971. Historically low interest rates have been one of the main drivers of the rapid housing price appreciation we’ve witnessed over the last 12-18 months.

The charts below, courtesy of the National Association of Realtors, show that low interest rates have kept affordability, based on mortgage payments vs income, lower than the ’05-’07 housing bubble despite housing prices soaring relative to income; even higher than ’05-’06 peaks.

Forecasting Future Rates

For years, we’ve been reading/hearing pundits say that it’s hard to imagine mortgage rates getting lower, often coupled with overly salesy messaging from the real estate industry that you must buy now because rates have never been so low and likely will not remain this low much longer. The problem with those claims is that mortgage rates have been dropping for about 40 years now (with relatively minor fluctuations along the way)…

With that said, even small fluctuations in rates in the near/mid-term impact affordability and buying decisions, making forecasts for the upcoming 12-24 months relevant to those currently, or soon-to-be, active in the buyer/seller market. The chart below shows the latest 30yr fixed mortgage rate forecasts from four leading housing research sources:

Everybody expects mortgage rates to increase over the next 12-24. This is mostly based on the expectation that the Fed will start easing its economic support and will increase interest rates (indirectly influences mortgage rates) to fend off inflation, so if that strategy changes, so too will mortgage rate forecasts.

It’s my belief that a slow, gradual increase in rates, as predicted by Fannie, Freddie, and NAR, is unlikely to have much influence on home values but any sharp increases, or even the pace predicted by MBA, could result in some downward pressure on prices. Home values are an important part of the US economy so you can expect efforts to be made by the Fed to prevent mortgage rate spikes that shock the housing market.

High Loan Limits

The Federal Housing Finance Agency (FHFA) just released new conforming loan limits for 2022, with significant increases to reflect recent price growth. The jurisdictions in the greater DC Metro area were given the maximum loan ceiling of $970,800. Beginning in 2022, Fannie/Freddie will insure loans up to $970,800 with as little as 5% down, or the equivalent of a purchase price just under $1,022,000 with 5% down. The new conforming limits increase the maximum loan amount with 3% down to $647,200, or the equivalent of a purchase price just over $667,000 with 3% down.

For any conforming loan (or any loan for that matter), borrowers must also qualify on several factors including credit score, debt-to-income ratio, first-time buyer status, and more. Feel free to reach out to me for lender recommendations if you’d like to explore your mortgage options.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

2020+ Interest Rate Predictions

Question: Do you expect interest rates to remain low in 2020?

Answer: Mortgage rates increased sharply in 2018, peaking at 7+ year highs in the fall of 2018, and most experts expected that trend to continue into 2019 and for 30yr rates to clear the 5% mark for the first time since spring 2010. However, changes in economic policy and financial markets pushed rates down at the end of 2018 and throughout 2019, coming close to all-time lows in the 2nd half of 2019.

Average 30yr Fixed Mortgage Rate Since 1971
Average 30yr Fixed Mortgage Rate Since 2010
Rates in 2020+

The Mortgage Bankers Association and Freddie Mac each predict that rates will remain low, right around current levels, through 2021 with an average 30yr Fixed Rate hovering around 3.7-3.8% through that period. The Mortgage Bankers Association predicts that rates won’t start increasing until 2022, when they’re predicting the average rate to increase modestly to 4.1%.

If these projections are accurate, it should support strong price growth over the next few years in Arlington, Northern VA, and the greater DC Metro.

However, keep in mind that just over 12 months ago, most experts predicted that mortgage rates would be over 5% by 2020 and, according to Freddie Mac, the average 30yr Fixed Rate last week was 3.64%. Changes in the global or US economy, the election, and the stock market can all change the course of rates in 2020 and beyond.

Lender Advice

If you’re considering purchasing in 2020, I wrote a column a few years ago about the value of a good lender that I’d encourage you to review. If you’d like to talk to somebody, I suggest reaching out to Jake Ryon of First Home Mortgage at JRyon@firsthome.com.

If you’d like to meet to discuss buying or selling in the area, don’t hesitate to reach out to me at Eli@EliResidential.com.