How rising inflation rates can affect your mortgage
As inflation rises, the cost of everything goes up, including real estate. However, if you can get a low interest, fixed rate mortgage, the cost of your home – an appreciating asset – will stay the same as the value of your property increases.
For those who already have a mortgage and might be worried about the effects of inflation, now is the time to refinance. It is very likely that rates will rise, not fall, over the coming year.
With mortgage rates hitting record lows – the 30-year average fixed mortgage interest rate was 3.24% in the last week of the year – a rate hike shouldn’t dampen the fiercely competitive US real estate market.
This means that new buyers might have less purchasing power. It also means that homeowners who are considering refinancing should not miss their chance to benefit from a low rate.
Real Money contributor Ed Ponsi says we’re sandwiched between inflation and other economic concerns, and the pandemic’s turn for the worse. But it has a sweet stock to buy and keep for the new year, with graphics and delicious reason. Learn more about it and get more real money investing ideas.
âHigh inflation, coupled with a less accommodating Federal Reserve in 2022, points to both higher mortgage rates and lower mortgage rates. Homeowners who haven’t yet refinanced should do so now, as any rate hike next year could erode potential savings, âsaid Greg McBride, senior vice president and chief financial analyst at Bankrate.com.
But for homebuyers, says McBride, âthe scarcity and price of available homes for sale will continue to be the biggest hurdles. Mortgage rates will still be at very attractive levels next year, so you don’t need to worry too much about that, âhe says.
Read: The Organization for Economic Co-operation and Development now expects price inflation to average 4.4 percent in 2022, down from 3.1 percent forecast in September’s forecast.
The Mortgage Bankers Association predicts that the 30-year average fixed mortgage rate will reach 3.7% by the third quarter of 2022 and 4% by the end of 2022. That would be a big increase from the current rate and well. above the 3.4% rate that Fannie Mae projects by the end of 2022.
U.S. inflation accelerated at the fastest rate in four decades last month, according to the Bureau of Labor Statistics, as soaring energy costs, rents and used cars increase pressure on consumer prices. This cements high inflation as a hallmark of the pandemic recovery and erosion of purchasing power even as wages rise.
More in our series on inflation:
Mortgage interest rates have a significant impact on the overall long-term cost of buying a home through financing. Mortgage rates have hovered near historic lows for much of this year, even as inflation has risen sharply in much of the economy.
While the financial health of borrowers affects the interest rate they will be offered on a loan, economic factors and the government’s monetary policy affect the entire mortgage rate process.
The Federal Reserve helps regulate inflation by raising, maintaining or lowering interest rates, which has a powerful effect on the overall economy. Their actions impact everything from the costs of borrowing in the real estate market and bond yields to the prices of commodities, like commodities.
Ultimately, inflation could allow borrowers to repay lenders with money worth less than the original loan, which benefits borrowers.
Inflation has always been lower than the average rate on a 30-year mortgage. But since April, inflation has been above the average long-term mortgage rate. The last time inflation exceeded the 30-year average mortgage rate was in August 1980, according to the Federal Reserve.
How to get the best mortgage rate
Even in the face of inflation, there are steps you can take to get the best mortgage rate. Taking these steps to get the best mortgage interest rate can save you real money, especially in the long run. These tips can help you whether you’re buying a home or refinancing.
Work on your credit score. If your score is below 760, it’s worth improving your credit score by taking steps to pay off your balances and make all of your payments on time. Having excellent credit will make you eligible for the lowest mortgage interest rates.
Lower your debt. This step can help you get the best mortgage rate in two ways. This lowers your debt to income ratio which lenders factor into the loan approval process and it will improve your credit score as well.
Apply to at least three lenders. Thousands of mortgage lenders are competing for your business. So another way to make sure you’re getting the best mortgage rate is to apply to at least three lenders and see which one is offering you the lowest rate. Lenders are required to provide you with a loan estimate. This document will show you the loan interest rate and closing costs, as well as other key details such as the cost of the loan in the first five years. Use it to see which lender offers the best rate and the best overall deal.