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While monitoring the Federal Reserve and its interest rate policy is an integral part of the homebuying and refinancing process, it’s not the only thing borrowers should consider. Mortgage interest ratesafter all, are driven by a complex combination of factorssome of which can negate each other and others of which can cause rates to spike or decline. And one of the more significant ones was revealed on Friday morning. Unfortunately, it wasn’t the news borrowers were hoping for.
Inflation in March surged to 3.3%, the highest rate in around two years, a new report from the Bureau of Labor Statistics revealed. This puts the rate around a point and a half above the Federal Reserve’s target 2% goal, and it could have widespread ramifications, particularly for homebuyers and owners hoping to finally refinance. And while dissecting the short and long-term impact of a single inflation report can be difficult to do with precision, there are some items borrowers should consider now.
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What the new inflation spike could mean for mortgage interest rates
An inflation rate increase like the one revealed on Friday could have detrimental effects on the mortgage rate space. Here’s what borrowers should consider now:
A mortgage rate lock could be the smart move to make
With the likelihood that today’s mortgage interest rates will be the most affordable ones borrowers can secure for the foreseeable future, many should consider the benefits associated with locking in a rate now. This will protect against any market conditions that cause rates to increase further, and it will allow for immediate, accurate budgeting by knowing precisely what rate you have.
And, if rates decline before closingborrowers can look to float their current rate down to the new, less expensive one. Or they could explore refinancing options after the home has been bought. But they won’t need to worry about rates increasing any further, which now seems increasingly likely.
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Rates will likely increase even in the absence of a Fed rate move
The Federal Reserve is just one driving force behind mortgage rates, even if it’s an important one. With an interest rate pause all but ensured this month (the CME Group’s FedWatch tool has a cut listed around 1% currently), borrowers shouldn’t expect the status quo to be maintained. Mortgage rates can and likely will increase even absent a Fed rate move in one direction or another.
This inflation news will be carefully interpreted by lenders, many of whom will raise rates to offset any associated market risks. In other words, if you already have a lender in mind that’s offering the most competitive rates, consider locking one in with them now, as they’re unlikely to stay where they are once the inflation news has a chance to reverberate more broadly.
The spring homebuying season is likely to slow
With inventory and home prices ticking up in March according to a report from Zillow, there was some optimism that this spring homebuying season could pick up the pace. But that trajectory could change now as the latest inflation report weighs down both lenders and borrowers.
At the same time, borrowers who can afford today’s rates, even if they’re less than ideal, may find a drop in competition helpful, especially considering the long-term mortgage rate forecast. Used strategically, these borrowers may even be positioned to negotiate prices downward in a way that may not have been if rates were lower and the homebuyer pool was larger.
The bottom line
An inflation surge isn’t the news borrowers were looking for in today’s economy, especially those looking to buy a home or refinance their current one. However, by being informed and understanding the potential ramifications, borrowers can better determine their next steps.
That may mean locking in a mortgage rate now, before they rise again, even without a formal Fed rate hike. But it could also mean less competition for limited inventory during this spring homebuying season, which can work in favor of buyers who can afford today’s rates. That said, it will take time for these latest developments to be reflected in the wider borrowing space, so staying informed and up to date on the latest news is critical. This approach could be the difference between exploiting a narrow, timely opportunity to buy or refinance or getting stuck on the sidelines a bit longer.