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A major Federal Reserve announcement this week is another important indication that mortgage rates will rise in 2022, experts say.

Federal Reserve Spokesman and Chairman Jerome Powell announced wednesday the Fed will slow down its bond buying program. “With high inflationary pressures and a rapidly strengthening labor market, the economy no longer needs increasing amounts of political support,” said Powell.

Powell acknowledged that forecasts and policies could evolve based on unexpected changes in the impact of Omicron or other variants of the coronavirus. “The increase in COVID cases in recent weeks, along with the emergence of the Omicron variant, poses risks to the outlook.”

This latest update from the Fed supports what experts have been saying all year: that mortgage rates will likely continue to rise as the economy recovers from the pandemic. “With the recent Fed announcement… there is a strong expectation that rates, including mortgage rates, will rise next year,” said Robert heck, vice president of mortgages at online broker Morty.

The 30-year fixed mortgage rate will increase to 3.5% next year says Laurent Yun, NAR Chief Economist and Senior Vice President of Research. Yun’s prediction came during the National Association of Realtors (NAR) year-end consensus forecast unveiling yesterday. Real estate forecasting summit.

The Federal Reserve has a lot of influence over the mortgage rate you get if you buy or refinance a home. Here’s what the Fed is doing, why it’s important to the mortgage rate market, and why you shouldn’t necessarily let it influence your buying or refinancing plans next year.

What is the Federal Reserve and what does it do?

The Federal Reserve, often referred to as “Fed”, acts like the central bank of the United States. Rather than being a bank, however, it is actually a system of banks. One of the Federal Reserve’s most important jobs is to manage the country’s monetary policy. The stated objectives of the Federal Reserve are as follows:

  • Promote as many jobs as possible
  • Moderate long-term interest rates in the US economy
  • Encourage stable prices
  • Monitor the impact of financial institutions on the US economy
  • Offer payment and settlement services to banks to promote liquidity

The Federal Reserve has different tools to achieve these goals. It sets its own benchmark rates linked to what it bills financial institutions. On top of that, the Federal Reserve has an impact by buying different assets, especially Treasuries, as a way to influence prices and rates.

Pro tip

Don’t rely on Fed rates to make decisions about your mortgage. Instead, consider your current situation and your budget when buying a home.

“Outside of bond buying programs, usually just raising their own rates and providing guidance on future rates, the Fed can have an impact on Treasury bond rates,” Heck said. “The expectations set by the Fed can also have an impact on how things work in the future.”

As a result, Heck points out, what the Federal Reserve does can spill over into markets, affecting a variety of things, from the cost of goods and services to the interest rate you pay on loans like credit cards and mortgages.

How Federal Reserve Decisions Affect Mortgage Rates

Federal Reserve interest rate announcements do not directly affect mortgage rates, says Shannon mclay, founder of Financial Gym, a financial planning and wellness service. Rather, it is an indirect influence.

What the Fed says about inflation and the overall health of the US economy can impact long-term mortgage rates. McLay said.

Mortgage rates can also be influenced by a secondary market. “There is a futures market where lenders and service providers who are on the primary origination side can use it to price mortgages. These are tied to treasury bills, ”says Heck. “So the Federal Reserve can buy treasury bills and mortgage backed securities (MBS), which can impact the market and, in turn, mortgage rates. “

One of the reasons the market has remained in a relatively low rate environment, even with recent inflation, is because the Federal Reserve has continued to keep its benchmark rate low. Concerns over the continued impact of the coronavirus pandemic prompted the Fed to act with caution, as noted in a November press release issued by the Fed. However, with inflation rising and the Fed has committed to trying to keep it at 2%, there is speculation that interest rates will rise in 2022.

What to consider when buying a mortgage

For homebuyers, Heck says it’s more important to focus on your own fundamentals rather than planning your plans and purchases based on Fed announcements or other economic trends.

“Trying to lock in a mortgage rate based on Fed meetings probably isn’t helpful,” Heck said. “Instead, potential buyers should focus more on the financial side of the transaction. Mortgage rates are generally not going to change dramatically during these one-off events. “

Rather than focusing on what the Federal Reserve does, take a look at what you can control more directly in your own finances.

Your monthly budget

First, make sure you can afford to buy a house to start, says McLay. Rather than dwell on current mortgage rates, she suggests using a mortgage calculator and totaling the cost of mortgage payment, taxes and insurance, as well as estimating maintenance and repair costs.

“If you are looking to buy a house that will cost $ 2,500 per month, but currently live somewhere and pay $ 1,800 per month, we recommend that you set up an automatic savings transfer of $ 700 per month. months to make sure the extra home expenses don’t cause a dramatic blow to your monthly budget, ”says McLay. “If you are able to complete this transfer for several months without having to deal with credit card or cash issues, then you know you can afford the house.”

Stick to a home buying budget

The exercise of creating a realistic home buying budget can not only help you decide if you are ready to shoulder the costs of home ownership, but it can also provide you with a way to ” assess the amount of your mortgage.

Decide how much you can afford for a house and stick to that budget. Sometimes borrowers get approval for a loan amount that doesn’t make sense for your budget. Make sure you budget that works for you by leaving room for other expenses, savings, investment, and the hidden costs of maintaining a home.

A real estate agent might try to get you to buy a little more, but you could end up in a worse financial situation if you stretch your budget to make room for a bigger mortgage.

Shop around for the best mortgage for your needs

While paying attention to the Fed and making decisions based on what it does isn’t the best way to decide when to buy a home, you still want the best possible mortgage rate.

“If you are looking for a mortgage, we strongly recommend that you research at least three rates and compare all elements of proposals from lending institutions,” McLay said. Pay attention to closing costs and lender fees. These costs are reflected in the Annual Percentage Rate (APR), which represents the lender’s costs embedded in the mortgage rate. “I’ve seen clients get mortgage approvals for the same 30-year interest rate, but the APRs were very different. It could cost you between $ 2,000 and $ 10,000 more in lender fees without realizing it, ”says McLay.

Even if you don’t get the absolute lowest rate, you could still potentially benefit from lower rates in the future through refinancing, McLay says. She recommends getting the best rate possible today and then positioning yourself to take advantage of future developments.

“It’s possible that rates will improve or worsen, and it’s hard to predict, even for experts,” Heck says. “So try to stay focused on affordability and make the right financial choice for you. “

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