Demystifying Mortgage Rates

Published on May 6, 2024
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What Is Going on with Mortgage Rates?

You may have heard mortgage rates are going to stay higher for longer than originally expected. Let’s break down the latest headlines and discuss how mortgage rates impact your ability to buy a home. 


Mortgage Rates: A Crash Course

A mortgage rate is the interest you are charged by a lender for borrowing money. When you are ready to buy a home, chances are you will need a mortgage. Your lender will charge an interest rate for borrowing this money throughout your loan. The lower the rate, the less you will pay. As of May 2024, a 30-year fixed-rate mortgage is between 6-7%. 


What’s Going on With Rates?

While many experts predicted that the Fed would lower mortgage rates in May, rates have remained fairly consistent. CBS MoneyWatch’s Angelica Leicht reported in May that it was unlikely that rates would drop as expected:

“At its May 1st meeting, the Federal Reserve opted to pause interest rate hikes and leave the federal funds rate at 5.25% to 5.50%, its highest level since 2001.”


Economic Factors That Impact Mortgage Rates

When it comes to mortgage rates, things like the job market, the pace of inflation, consumer spending and more have an impact. The biggest impact is the Federal Reserve, also know as the Fed, and its decisions on monetary policy. 

In early 2022, the Fed decided to start raising the Federal Funds Rate to slow down rapid inflation. The Federal Funds Rate impacts how much it costs banks to borrow money from each other. While the rate doesn’t determine mortgage rates, mortgage rates consistently respond when this rate changes. And that’s when mortgage rates started to climb.

And while there’s been a ton of headway seeing inflation come down since then, it still isn’t back to where the Fed wants it to be at 2%. The graph below shows inflation since the spike in early 2022, and where we are now compared to their target rate:


As the graph shows, we’re much closer to their goal of 2% inflation than we were in 2022 – but we’re not there yet. It’s even inched up a hair over the last 3 months – and that’s having an impact on the Fed’s plans. Many experts agree that inflation is one of the biggest issues the Feds are trying to combat. As Sam Khater, Chief Economist at Freddie Mac, explains:

“Strong incoming economic and inflation data has caused the market to re-evaluate the path of monetary policy, leading to higher mortgage rates.”


When Will Mortgage Rates Come Down?

Based on current market data, experts think inflation will be more under control and we still may see the Fed lower the Federal Funds Rate later this year. However, this change will be later than originally expected. As Mike Fratantoni, Chief Economist at the Mortgage Bankers Association, said in response to the Federal Open Market Committee’s (FOMC) decision:

“The FOMC did not change the federal funds target at its May meeting, as incoming data regarding the strength of the economy and stubbornly high inflation have resulted in a shift in the timing of a first-rate cut. We expect mortgage rates to drop later this year, but not as far or as fast as we previously had predicted.”


Should I Wait?

While the idea of a lower monthly payment is appealing, experts warn against trying to outsmart the market. As shown, mortgage rates are notoriously hard to forecast. With the multiple political and financial factors at play, even economic experts have a hard time predicting when mortgage rates will lower. And while you wait, home prices are only increasing. 

If rates come down, more potential buyers are going to enter the market, ready to take advantage of the lowered rate. And that means you will have a lot more competition from other buyers. That may make your move more stressful if you wait because greater demand could lead to an increase in multiple offer scenarios and rising prices.

This is one of the reasons it’s usually not a good strategy to try to time the market. Bankrate writers Jeff Ostrowski and Erik J. Martin gave this advice:

“ . . . trying to time the market is generally a bad idea. If buying a house is the right move for you now, don’t stress about trends or economic outlooks.”

What’s more important than trying to predict the future market is focusing and planning on your homeownership goals. You may not be able to wait years, even months, to prolong the home buying process in hopes of a lower rate. Instead of waiting and expecting rates to dip, focus on your timeline. If you wait, the perfect home could pass you by. 


Bottom Line

While mortgage rates are an important factor when buying a home, what’s more important is your homeownership goals and timeline. If you have any concerns or questions, a Seven Gables agent is here to walk you through your best options.