In June, the Federal Reserve announced the largest spike in interest rate since 1994 as the US central bank struggles to keep inflation in check. The interest rate was increased by 0.75% in the wake of a 0.5% increase in May and a 0.25% in March.
Changes in interest rates can have both negative and positive repercussions for the economy. The central bank often changes its interest rate in response to the overall economic activity. It will raise the rate when the consumer spending power and economy are strong and lower the rate when the economy is slow.
In the United States, the Federal Reserve is responsible for setting the target interest at which banks lend and borrow money from one another, which has a ripple effect across the entire economy. But how do interest rates impact inflation?
What Happens When Interest Rate Rises?
With every loan, lenders risk the borrower will not be able to repay the money. To compensate the lenders for this probability, they are given the reward of interest.
Interest is the percentage of the borrowed money that lenders charge the borrower when they repay the loan. Since interest makes lending possible, it allows borrowers to make a purchase immediately instead of waiting to save up. The lower the interest, the more willing and able people are to borrow money to make large purchases like homes.
However, when people pay less interest, they have more money to spend, which can result in a ripple effect of the increased amount of spending throughout the economy and higher demand.
On the other hand, when interest rates rise, consumers have less buying power and need to cut back on how much they spend. This also results in fewer people requesting loans. However, by raising the interest rates sharply, Fed also hopes to reduce the high load on supply, which is responsible for higher prices or inflation.
When interest rates are high, it is more expensive to buy a house or card or carry a credit card balance. If it is too expensive to borrow money, consumers will reduce their spending. When spending declines, the demand will also fall, which will stabilize the price of everyday goods and reduce inflation.
However, this also comes with its own set of risks. A combination of high-interest rates, high inflation, and slow growth can result in a recession. So it is important for the Fed to make its move carefully.
Why is the Current Mortgage Rate High?
According to the Bureau of Labor Statistics, consumer prices were up by 8.6% from the previous year. This cost increase was not just associated with gas and groceries but with a wide range of services, including airfare and rent.
Since rising prices have a domino effect, inflation also started taking a toll on retail sales, including furniture, electronics, and appliances, which fell 0.3% in May, as consumers started spending more on essentials like fuel and groceries.
In the coming months, the cost of goods and services is expected to rise even more. As such, the Fed says it expects interest rates to climb to 3.4% by the end of 2022.
Because of this, mortgage rates have risen sharply, putting houses out of reach of many potential home buyers. According to Bankrate, the average rate on a 30-year fixed home loan is 6%, which is about double that of last year’s.
This means that it may take some time for mortgage rates to fall if you are thinking of buying a home.
Mortgage Rate Prediction for the Coming Months
The Federal Reserve’s decision and the rising inflation are all putting pressure on mortgage rates. As inflation increases, the Fed will also increase the interest rates, leading to a higher mortgage.
As such, experts forecast that the 30-year fixed mortgage rate will go up to a high of 7% by December 31, 2022.
According to Realtor.com, the mortgage rates are expected to vacillate between 5.5 to 6% between now and the end of 2022. MBA states the mortgage rates have already peaked and may stay between 5% to 5.5% till the end of this year. On the other hand, the NAR says the mortgage rate may go up to as much as 7%, particularly if the fuel supply remains constrained, which may push up energy prices during the winter season.
The Current State of Homeowners
With mortgage rates seeing a record-high and some even expecting them to go up even further, homeowners are trying to find ways to save money through refinancing. According to the data analytics company Black Knight, less than one million homeowners will be able to refinance their mortgage since every time mortgage rates become higher, fewer borrowers can save money through refinancing.
Refinancing can be a smart decision if you want to lower your monthly payment and get the most out of your equity. If you are looking to refinance your mortgage in 2022 and the coming years, Integrity Mortgage LLC (NMLS #1692497) can help. We can help you find out the best refinancing options by evaluating the different terms, rates, eligibility requirements, and customer satisfaction ratings of lenders. Reach out to us today to get smart refinancing for your home.