Whether you have plans to buy a new home or to refinance your existing mortgage in 2022, you may be keeping a close eye on mortgage rates. Interest rates have risen since the beginning of 2022, but they are still relatively close to the historical lows that have been common over the last decade. Nonetheless, with rates poised to possibly rise throughout the rest of 2022, to levels not seen in over a decade, you may be wondering how rate increases will impact your mortgage.
The mortgage rate that you qualify for will drive your home loan payment. If you have a fixed rate mortgage, you may be locked into this payment until until you refinance the loan, pay off the loan or sell the home. The interest rate also impacts interest charges, especially if you have a floating rate mortgage and could impact how quickly equity is established in your property. Even a small increase in the rate can play a sizable role in each of these features. While you do not want to apply for a new mortgage until you are ready to do so, you also want to take advantage of the lowest interest rate possible. With this in mind, what drives rate changes?
There are a few primary factors that can impact mortgage rates. Rates are heavily driven by supply and demand. As the demand for new mortgages increases, interest rates may increase. At the same time, decreased demand for mortgages may result in lower rates. Keep in mind that many factors can result in the demand for mortgages. For example, rapidly rising housing prices may result in an increased demand for refinance loans. A tight housing market may keep interest rates lower. This becomes more complicated when you consider the factors that drive the housing market, such as the cost of building materials, available inventory, the unemployment rate and more.
In addition, the availability of money to banks and their cost to access money drives interest rates. If the supply of low cost credit to the banks increases- often driven by the Federal Reserve - interest rates may drop. Likewise, if the cost of credit to the banks increases - often when the Federal Reserve raises rates, or is about to raise interest rates, mortgage related rates often increase.
You can see that many factors cause interest rates to rise and fall. There are times when mortgage rates rise or fall quickly, such as when the Federal Reserve changes its lending rate. However, all of the other factors as well as the sub-factors that drive them combine to create smaller upward and downward rate movements each day.
Mortgage rates are calculated by adding an index rate with a margin. Each bank establishes its own margin, and this can drive differences in interest rates from lender to lender. The index rate, however, is a benchmark that the margin is tethered. A common index used to calculate the 30-year fixed-rate loans is the 10-year Treasury rate. The Federal Reserve does not directly change the 10-year Treasury rate. However, a change to the Federal Reserve’s key rate impacts the demand for Treasury securities. In turn, this drives the 10-year Treasury rate and the 30-year fixed-rate loans. Other indexes may be used to determine rates for different fixed-rate and adjustable-rate loans, but all of these indexes are ultimately tied to the Federal Reserve’s key rate.
Why does the Federal Reserve raise interest rates? One of the key reasons for its change in monetary policy is to manage inflation. In February 2022, the year-on-year inflationary rate increased by 7.9 percent. In March 2022, it rose to 8.5 percent. This means that the cost of energy, healthcare, food and more increased at the highest rate in decades. The Federal Reserve deemed that this inflation rate was too high. As a result, it has already raised interest rates at its last two meetings, and it has announced plans to continue hiking rates throughout the rest of the year. Through this effort, the Federal Reserve plans to drive down inflation. However, it is important to note that other factors are driving inflation as well, such as lingering supply and demand issues from the pandemic, the Ukraine crisis and other factors such as government regulatory policies.
The Federal Reserve has increased its key rate by one-quarter percent at each of the last two meetings in 2022. Its rate was at zero at the beginning of 2022, and it is currently at a half-percent. Recently, the Federal Reserve Chairman, Jerome Powell, announced that a half-percent rate increase is possible at their next meeting, and some market observers think three-quarters of a percent. This meeting will be held on May 3 and May 4. Specifically, the Chairman stated concerns about a rapidly rising inflation rate are driving this decision.
More than that, the Federal Reserve also announced its plans for rate increases throughout the rest of the year. Some members of the Federal Reserve have mentioned that another half-percent increase, or even more, to the key rate may be necessary in June or later in the year, to tame inflation. In March 2022, the Federal Reserve indicated that as many as seven interest rate increases that range between one-quarter and one-half percent may be necessary throughout 2022 to keep inflation under control. More recently, it has stated that nine increases may be more appropriate. If the May and June increases of a half-percent each are followed by seven additional increases of one-quarter of a percent, the total impact to the key rate by the end of the year may be 3.25 percent, if not higher.
Generally, you can expect the 10-year Treasury rate to increase in direct conjunction with the Federal Reserve rate. This means that the 10-year Treasury rate will likely increase by 3.25 percent over the course of 2022. Mortgage interest rates will follow suit as well.
As you prepare to apply for your next purchase or refinance loan, you may be wondering if you should take advantage of the lower interest rates for adjustable-rate mortgages. These interest rates are usually significantly lower than the rates for a 30-year fixed-rate mortgage. In fact, the current differential is greater than a half-percent. This can equate to a substantial difference in your mortgage payment, interest charges and other factors. However, is an ARM the right loan option for you?
With a fixed-rate mortgage, your interest rate remains the same for the life of the loan. This means that your mortgage payment also holds steady. On the other hand, an ARM will have an initial period where the interest rate is fixed. Commonly, this may be for three, five, seven or 10 years. After the initial fixed-rate period expires, the interest rate will start to adjust. The new interest rate will be calculated by adding the predetermined margin for the loan to the benchmark index. As you can see from the projected increases for 2022, the index can increase substantially in a relatively short period of time. With this in mind, it is not possible to accurately project what your new rate will be down the road. The rate can increase or decrease, and this means that your mortgage payment can increase or decrease. Depending on the terms of your loan, the rate may adjust every six to 12 months for the remaining life of the loan.
Your new mortgage may be one of the most substantial expenses in your budget for years to come. With this in mind, it makes sense to prepare yourself thoroughly for the mortgage application process. What can you do to prepare for your application?
With the Squeeze ClearRate™, we make it easy for you to get a better interest rate and to find a loan program that is a smart fit for your needs. Are you ready to explore the possibilities in greater detail? To learn more about your 2022 mortgage options, complete our purchase and refinancing form today.
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