Mortgage rates continue to trend sharply upward, jumping from 3.10% to 3.14% on Wednesday, continuing to confirm that the golden era of refinancing may be drawing to a close, as experts expect. Over the past two years or so, a handful of factors -- including surging home values, COVID-19 migration and low interest rates -- combined to create a nearly ideal environment for homeowners looking to refinance, as mortgage rates dipped below 2% for the first time ever.
Read more: Today's refinance interest rates
Though rates have rebounded slightly since then, they remain remarkably, historically low. But that may soon change, according to a chorus of economists, real estate experts and mortgage sellers. "If you're thinking about refinancing, do it now," said Kimber White, past media president of the National Association of Mortgage Brokers.
As the Federal Reserve considers reducing some stimulus programs and the US Treasury inches closer to hitting the debt ceiling, a variety of economic trends are converging to rattle the market. The bottom line: If your mortgage rate is 3.5% or higher, this remains a very good time to lock in an all-time low refinance rate.
"Our forecast is for rates to increase gradually over the next year, and we can expect an overall slowing in refinance activity as a result," according to Joel Kan, economic and industry forecaster at the Mortgage Bankers Association. The MBA is forecasting that by the end of 2022, the 30-year fixed-rate mortgage will increase to 4%.
Of course, no one knows for sure what will happen. But here's an overview of some of the factors that could drive mortgage interest rates higher -- and why right now is a good time to move forward with refinancing.
Flirting with the debt ceiling
The biggest wild card is the debt ceiling. If Congress doesn't raise or suspend the debt ceiling -- and fast -- the US Treasury is expected to default on its financial obligations sometime between Oct. 15 and Nov. 4, according to a recent analysis from the Bipartisan Policy Center. We don't know exactly what will happen if the US defaults -- it would be an unprecedented event -- but it would almost certainly drive interest rates higher. "If they don't lift the debt ceiling, that's going to crash the stock market and everything else," White said. "That definitely can affect the mortgage rates and our housing market."
Brendan McKay, president of broker advocacy at the Association of Independent Mortgage Experts, agrees. "If things are bad for the economy, the stock market goes down," he explains. "This causes people to move their money from the market to bonds, bond prices go up and interest rates go down. But if it's also a government problem -- that probably would cause bonds to go down as well as stocks, causing interest rates to go up."
The Fed starts to taper
To counter the economic fallout of the COVID-19 pandemic, the Fed cut interest rates and accelerated its purchasing of government-backed bonds. Since then, the Fed has been buying $40 billion of mortgage-backed bonds each month. But as the US economy continues to recover, the Fed has indicated that it will "soon" taper its investment in mortgage-backed securities. In September, Chairman Jerome Powell indicated that the Fed could start tapering around the time of its next meeting in November.
"When the Fed starts tapering it off, that's most likely going to cause interest rates to go up unless there's suddenly a big push from the secondary market -- Wall Street, basically -- to buy mortgage-backed securities at these low interest rates," according to McKay.
While no official decision has been made, Chairman Powell also indicated that Fed members are unified around the decision to wrap up the tapering effort by mid-2022 -- as long as the economic recovery remains on track. The Fed is also expected to increase interest rates around the end of 2022 or early 2023, according to Chairman Powell's speech at the Committee hearing.
Inflation drives prices higher
In September, the Consumer Price Index for US goods and services was 5.3% higher than a year earlier -- its sharpest increase since the US housing market crash in 2008. In his July testimony before the House Financial Services Committee, Powell acknowledged that inflation has risen to unexpectedly high levels, but reassured lawmakers that the Fed is monitoring the situation "night and day." Though he reiterated that interest rate increases weren't on the table at that point, that could change.
Where mortgage interest rates are headed
The confluence of factors outlined above suggests that mortgage interest rates are poised to rise. And though it will likely be a climb that's slow, steady and not always linear, experts expect an overall increase over the coming months. Waiting around too long in order to grab the lowest rate may cost you in the long run.
"If somebody waits to refinance and rates go up, the natural human inclination is to chase the lower rates -- it's the gambler's fallacy and everyone's prone to it," McKay said.
If you haven't refinanced your mortgage because you don't know how to do it, there are plenty of resources out there to help you through it.
"If refinancing makes financial sense for somebody, yes, they should do it today, they should do it tomorrow, they should do it immediately," McKay said. "Not because I think rates are going to go up or down, but because it makes financial sense."
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