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 ASAP.

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

This would be the first half-point hike in over 20 years. And although the Fed doesn’t set mortgage rates, they’re likely to move significantly higher when the fed funds rate goes up.

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

How likely is a Fed rate hike?

How likely is a half-point increase to the fed funds rate? Well, the CME FedWatch Tool put the likelihood at 91% in mid-April.

But that could be just the start of a series of rate hikes. As The Wall Street Journal noted on Apr. 14, “investors expect the Federal Reserve to move quickly to combat surging inflation in America by raising interest rates multiple times.”

The FOMC has six meetings scheduled for the remainder of 2022. And some fear it will hike rates by 0.25-0.50% at every one of those. Some even wonder if a 0.75% increase could be in the cards.

Whatever the case, a higher-rate environment seems inevitable. And while fixed mortgage rates move independently of the fed funds rate, they often rise and fall in tandem with it. So mortgage borrowers can expect to see rates rise, too.

Who will be affected by rising rates?

Nearly all variable-rate borrowing is directly or indirectly tied to the federal funds rate. You can expect rates on credit cards, auto loans, personal loans, adjustable-rate mortgages, and other such loans to increase very soon after May 4.

In theory, Fed rate hikes don’t directly affect fixed-rate mortgages (FRMs). But, in practice, they typically have an influence and borrowers can expect to see higher fixed rates on the mortgage market.

Of course, if you have an existing fixed-rate mortgage, nothing will change. Rate increases only apply to new borrowers, including home buyers and existing homeowners hoping to refinance or cash-out refinance.

Who should refinance right now?

Mortgage rates have already risen, which can make refinancing look unattractive to the majority of homeowners.

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

1. If you have an adjustable-rate mortgage (ARM): ARM interest rates are directly tied to the broader interest rate market and will increase when the Fed raises its target rate. If you currently have an ARM, your existing, incredibly low rate could soon become uncomfortably high. If your rate is set to adjust in the near future, you may want to refinance into a fixed-rate mortgage to avoid even higher rates later on
2. If you have an FHA loan and you can cancel mortgage insurance: If you have an FHA loan and your current mortgage is at 80% LTV or lower, now may be your last chance to refinance into a relatively low-rate conventional loan with no PMI. Talk to your loan officer about canceling mortgage insurance before rates rise further
3. If you still have a rate above current market rates: If you bought your home a long time ago — or if your finances have improved since you purchased — your existing mortgage rate might be above the current market. In that case, it may be worth refinancing to lower your rate and monthly payment
4. If you want to cash out home equity: If you’re planning to cash out home equity in the near future, try to do so sooner rather than later so you can lock in the lowest rate possible on your new mortgage

If any of these apply to you, you should urgently explore your options because refinance rates might rise very soon.

Easing mortgage stimulus will push rates higher, too

Nobody 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 traded for weeks as if it’s already happened.

But, even if that hike’s impact is limited or zero, the Fed’s due to drop another bombshell at its next meeting. And it could have far bigger consequences for mortgage rates than a single rate increase.

The end of quantitative easing

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

Those bonds included mortgage-backed securities (MBS), which the Fed bought to drive mortgage rates artificially lower. And that worked well, with 16 all-time lows set in 2020, according to Freddie Mac’s archives.

By Apr. 14, 2022, the Fed owned $2.74 trillion of those MBS.

But recently, the Fed’s been signaling that it will soon begin to run down that $2.74 trillion stockpile. And it should unveil plans for doing so on May 4.

MBS and higher rates

By purchasing vast quantities of MBS, the Fed drove mortgage rates to record lows in 2020 and 2021. And when it begins to reduce its stockpile, you can imagine what will happen: rates will rise higher still.

If those plans are more aggressive than markets are expecting, that could send mortgage rates shooting up. Of course, if they’re less aggressive, mortgage rates could potentially dip.

But are you willing to wager your refinance rate on the Fed going easy? Its recent rhetoric suggests it’s in no mood to play nicely.

Refinance now before the Fed raises rates

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

Nobody, 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 how markets will react.

But whatever happens that day, we believe mortgage rates will continue to move higher for some months to come. So if you have good reason to refinance, and you want to do it before rates move higher still, now’s the time to start.