Why Mortgage Rates Are Dropping Despite the Latest Big Fed Rate Increase

The Federal Reserve announced a 75-point interest rate hike Wednesday, but experts believe its influence on the mortgage market has already baked in.

“The market’s already priced in an increase,” Peter Boomer, executive vice president at PNC Bank, told NextAdvisor last week.

Around the same time as the Fed’s rate increase announcement came out, new data showed the average 30-year fixed mortgage rate made a big move in the opposite direction. The average 30-year fixed rate was 5.59%, 17 points lower than last week, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures.

This decrease comes after a volatile June and early July that saw rates swing up and down. A larger-than-expected inflation rate of 9.1% was released earlier in July. In response, the Fed suddenly switched from eyeing a 50-basis-point hike in its benchmark short-term interest rate to a larger 75-point hike to address the higher inflation.

In a similar survey by the government-sponsored entity Freddie Mac, the average 30-year fixed rate dropped by 24 points to 5.3%.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” according to the Federal Reserve’s recent press release.

What to Expect: How Mortgage Rates Will Be Affected After July Rate Hike

The Fed’s actions aren’t directly related to mortgage rates but do affect lenders’ cost of funds, says Eileen Derks, senior vice president and head of mortgage at Laurel Road, an online lender owned by KeyBank. Most lenders have already priced in expected increases in those costs because of inflation. “Costs aren’t always directly related to the Fed changes but there have been parallels since last December,” she says. Mortgage rates often move in anticipation of expected increases in lenders’ costs to avoid sudden sticker shock, she says.

Still, future mortgage rate volatility would not come as a surprise. “I think we’re going to be in a little bit of a rollercoaster” as the country navigates efforts to bring down inflation and avoid a recession, Boomer told us.

The latest Fed rate hike has implications for other parts of your financial life. It will likely lead to a higher cost of borrowing with increased interest rates for credit cards, along with home equity loans and lines of credit (HELOCs). On the other hand, the rate increases bring good news for savers, in the form of better yields on high-yield savings accounts and other savings tools.

Experts agree the latest Fed rate increase and its potential impact on the mortgage market shouldn’t cause homebuyers to pause or drastically alter their plans. The rate and terms a borrower gets quoted depends more heavily on a borrower’s personal credit, loan type, and what mortgage lender they choose.

How the Fed’s Rate Hike Announcement Affects Mortgage Borrowers

Homebuyers are feeling the effects of both rising home prices and mortgage rates. Home prices are hitting all-time highs, but higher mortgage rates have softened some demand for homes.

However, fewer buyers will be able to afford a home because of rising interest rates and increasing home prices, Dr. Jessica Lautz, vice president demographics and behavioral insights for the National Association of Realtors told us. While unaffordable housing isn’t a good thing, it does mean that buyers still in the market may have more time to find the perfect home.

A slower housing market could lead to prices coming down in some markets. “There’s about 15-16 markets that will correct, whereas others will just slow in their appreciation or just stay flat,” says Derks. This could give buyers back some bargaining power they lost during the hottest years of this housing boom.

Because of the higher mortgage rates, the summer homebuying season will have fewer bidders and homes won’t be selling over the asking at the rate they are right now, Selma Hepp, deputy chief economist at CoreLogic, told NextAdvisor.

Here’s what homebuyers can focus on no matter what’s happening with rates:

Adjust Your Homebuying Budget

Instead of timing the mortgage rate market, find a rate you’re comfortable with that fits into a monthly mortgage payment you can afford. When figuring out your homebuying budget, factor in potential rate increases so you can see how much a change could affect your monthly payment. Don’t stretch your budget to make the rate fit, instead, lower your home purchase budget to accommodate a higher rate. Whatever happens with interest rates in the coming weeks, Derks says the most important thing is to ensure you can afford the home you’re looking at. “In this environment, if rates are a little bit higher, really reflect on needs versus wants so you get into a house you can afford,” she says. “Make sure you can afford it and enjoy your life and not be living for your house.”

Work on Your Credit Profile

The average mortgage rate reported in the news is just the average. What borrowers need to focus on is their own personal credit profile. “Take care, first and foremost of your credit quality,” Derks told us. The better your credit score the better the interest rate and loan type you can qualify for.

Shop Multiple Mortgage Lenders

Shop around with a few different lenders, such as credit union, local banks, or online lenders to see who gives you the best offer. “Make sure you’re dealing with a very reputable lender in these times. It is now more important,” says Boomer. Pay attention to the fees and not just the interest rate. For example, one lender may quote a low rate but charge higher fees, defeating the point of the low rate. Ask your current banks or financial institutions if they have offers for existing customers, Derks told us

Work With a Real Estate Agent You Can Trust

Work with a qualified, professional and experienced real estate agent and loan officer, Boomer says, especially those who know the community you’re shopping in. “You need to be working with a real estate professional in that local market,” says Boomer. “The same is true with a loan officer.”

Consider Adjustable-Rate Mortgages

Take into consideration different mortgage options. More and more borrowers are considering adjustable-rate mortgages, both Derks and Boomer told us. Most ARMs have a lower interest rate for a set period at the start of the loan and then the rate changes regularly after that, typically every six months or every year, depending on the market. ARM loans could make sense as long as you know the risks. The lower “teaser” rate might make a home more affordable, especially if you’re planning to move after a few years. You can also refinance during that period if rates drop.

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