Still want to refinance? Do it before the Fed raises rates in May


Refinance before the Fed raises rates

If you want to refinance your mortgage before the Fed raises rates, you’ll need to get started as soon as possible.

The next Federal Reserve meeting on May 4, 2022 will likely be a critical date for mortgage rates. The Fed has already indicated that it may raise rates by 50 basis points (0.50%) at this time.

It would be the first half-point increase in more than 20 years. And while the Fed doesn’t set mortgage rates, they are likely to rise significantly when the fed funds rate rises.

For anyone still waiting to refinance, now is the time to apply and lock in a rate before the Fed makes a historic move.

How likely is a Fed rate hike?

What is the probability of a half-point increase in the fed funds rate? Well, the CME tool FedWatch put the probability at 91% in mid-April.

But this could just be the start of a series of rate hikes. As the Wall Street Journal noted on April 14, “Investors expect the Federal Reserve to act quickly to combat soaring inflation in the United States by repeatedly raising interest rates “.

The FOMC has six meetings scheduled for the rest of 2022. And some fear it will raise rates by 0.25-0.50% at each of them. Some even wonder if a 0.75% increase might be in the cards.

Either way, a higher rate environment seems inevitable. And although fixed mortgage rates move independently of the federal funds rate, they often rise and fall in parallel with it. So mortgage borrowers can also expect to see rates go up.

Who will be affected by the rate hike?

Almost all floating rate borrowings are directly or indirectly tied to the federal funds rate. You can expect rates on credit cards, car loans, personal loans, adjustable rate mortgages and other similar loans to increase very soon after May 4th.

In theory, Fed rate hikes do not directly affect fixed rate mortgages (FRMs). But, in practice, they generally have an influence and borrowers can expect to see higher fixed rates in the mortgage market.

Of course, if you already have a fixed rate mortgage, nothing will change. The rate increases only apply to new borrowers, including homebuyers and existing owners who want to refinance or cash out a refinance.

Who should refinance now?

Mortgage rates have already risen, which may make refinancing unattractive for the majority of homeowners.

But for some, a refinance is still worth it. There are several reasons why you might want to refinance before rates go up again.

  1. If you have an adjustable rate mortgage (ARM): ARM interest rates are directly tied to the broader interest rate market and will rise when the Fed raises its target rate. If you currently have an ARM, your existing incredibly low rate may soon become uncomfortably high. If your rate needs to adjust in the near future, you may want to refinance to a fixed rate mortgage to avoid even higher rates down the road.
  2. If you have an FHA loan and can cancel mortgage insurance: If you have an FHA loan and your current mortgage is at 80% or less, this may be your last chance to refinance a relatively low rate conventional loan without PMI. Talk to your loan officer about canceling mortgage insurance before rates go up any further
  3. If you still have a rate above current market rates: If you bought your house a long time ago — or if your finances have improved since you bought it — your current mortgage rate could be higher than the current market. In this case, it may be interesting to refinance to reduce your rate and your monthly payment.
  4. If you want to cash out the equity in your home: If you plan on cashing in on your home equity in the near future, try to do so as soon as possible so you can get the lowest possible rate on your new mortgage.

If any of these apply to you, you need to explore your options urgently, as refinance rates could go up very soon.

Easing mortgage stimulus will also drive rates higher

No one knows for sure what will happen to mortgage and refinance rates on May 4. Expectations of a 0.50% rate hike are so widespread that mortgage bonds have been trading for weeks as if it has already happened.

But, even if the impact of this rise is limited or nil, the Fed should drop another bombshell at its next meeting. And that could have a much bigger impact on mortgage rates than a single rate hike.

The end of quantitative easing

When the COVID-19 pandemic started to bite, the Fed launched a stimulus program to keep the economy afloat. This was called “quantitative easing” and involved cutting interest rates and buying quantities of bonds.

These bonds included mortgage-backed securities (MBS), which the Fed bought to artificially lower mortgage rates. And it worked out well, with 16 all-time lows set in 2020, according to Freddie Mac records.

As of April 14, 2022, the Fed owned $2.74 trillion of these MBS.

But recently, the Fed signaled that it would soon begin depleting that $2.74 trillion stockpile. And he is expected to unveil his plans to do so on May 4.

MBS and higher rates

By buying large amounts of MBS, the Fed has driven mortgage rates to record lows in 2020 and 2021. And when it starts to reduce its stock, you can imagine what will happen: rates will rise further.

If these plans are more aggressive than the markets expect, it could push up mortgage rates. Of course, if they are less aggressive, mortgage rates could potentially come down.

But are you willing to bet your refinance rate on the Fed ease? His recent rhetoric suggests he’s in no mood to play well.

Refinance now before the Fed raises rates

If you want to lock in your refinance rate before May 4, you have no time to waste.

No one, probably not even the Fed itself, knows exactly what will be announced on May 4 after the next FOMC meeting. Nor can anyone be sure of the reaction of the markets.

But whatever happens that day, we believe mortgage rates will continue to rise for a few months. So if you have good reason to refinance and want to do it before rates go up again, now is the time to start.

The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.


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