Fed rate hikes seem likely this year: What does that mean for mortgage rates?

The Federal Reserve froze interest rates again this month, but signaled hikes are on the horizon after nine officials penciled in at least one increase before the end of the year. And on Thursday, CME Group’s FedWatch tool, which predicts rate action from the central bank, echoed the hawkish positioning, also leaning toward an increase at the central bank’s September meeting.

If you’re an aspiring homebuyer, you might be thinking, “should I buy a home and get a mortgage now?” And if you’re a homeowner, you might be wondering, “is it time to refinance?” After all, mortgage rates are down from a year prior, according to the most recent Freddie Mac data. (See mortgage rates in your area here, from our ad partner Bankrate.)

We asked pros to explain what the Fed’s movements have to do with your mortgage rate—and whether that means it’s time to jump into the mortgage market.

Pros say the relationship between long-term mortgage rates and the Fed’s rate decisions is one of the most misunderstood chains in finance. Yes, the Fed’s movements can impact mortgage rates, but that’s far from the full story.

“I sit with homeowners every month who confuse what the Fed does with what their mortgage does, and the gap between those two things costs people real money,” says Jeff Judge, a certified financial planner at Chesapeake Financial Planners, noting that “the Fed sets overnight rates, not your mortgage.”

Mortgage rates don’t dance in concert with the Fed’s live decisions; instead, they closely track the 10-year Treasury note, a forward-looking benchmark determined by open-market bond investors forecasting future inflation and economic growth. If investors believe inflation will remain sticky despite central bank interventions, they will immediately demand a higher yield on the 10-year Treasury to protect their purchasing power. This means that if the Fed signals a rate hike months in advance, market yields and consumer mortgage rates will often spike long before an official vote takes place.

“The bond market priced in the shift the moment the projections came out,” Judge says. “Waiting for the news to hit is waiting for something that already happened.”

Why do 30-year mortgage rates track long-term 10-year Treasury notes instead of a 30-year benchmark like 30-year U.S. Treasury bonds? It all comes down to the actual lifespan of a home loan. While the average homeowner signs up for a 30-year mortgage to keep their monthly payments affordable, they rarely keep the loan for three decades. Between life changes, relocations and refinancing when rates drop, a recent SoFi report found the typical U.S. mortgage only stays on the books for about seven to 10 years before it is paid off — or moved to another bank. Because institutional investors are well aware of this timeline, they treat home loans like a 10-year investment. 

So why did mortgage rates go up after the Fed meeting this time? It wasn’t because the central bank held rates steady, says Britton Williams, a certified financial planner at Calamita Wealth Management. In this instance, it resulted directly from the “hawkish tone in the updated projections,” Williams says, adding that given “the 30-year is sitting around 6.5% to 6.7% now—an October hike that everyone already expects probably won’t move things much further, because it’s the surprise that moves rates, and there’s not much surprise left.”

Should you react?

So now that rates seem to be in a holding pattern, is it time to refinance or get a mortgage before things change again?

Few recent buyers should really be considering refinancing right now, Williams says. “A refinance only pencils out if your current rate is clearly higher,” he says, adding that “realistically the folks who bought in 2023 or 2024 when rates hit 7% to 8%” would likely fall into that category. Others might not.

Homeowners awaiting the end of an adjustable-rate mortgage may require a bit more focus. In those cases, homeowners who locked in a 3- or 5-year hybrid ARM earlier in the decade may soon be re-entering a higher rate market, making a refi more of a defensive play to protect their monthly payment obligations.

To help determine whether you should take action, Joon Um, a certified financial planner at Secure Tax & Accounting, says it’s key to first determine whether it makes financial sense. “Refinancing comes down to break-even,” Um says. “If the monthly savings don’t recover the closing costs in a reasonable period, it may not be worth it. If you already have a mortgage in the 3% range, refinancing is usually hard to justify. If you’re waiting, watch inflation and the 10-year Treasury.”

One key indicator for future rate changes may feel contradictory, but it can help plan for your next move, says Thomas Ravert, a certified financial planner at Pathway Capital. “Rates are more likely to peak when inflation cools, the 10-year Treasury stops climbing, Treasury demand improves, and the spread between mortgage rates and Treasurys narrows,” Ravert says. “My advice is simple: Do not refinance out of fear, and don’t wait because of hope. Know your break-even point. If the math works, act. If the math does not work, wait.”

As for starting a new mortgage, buyer interest across the board is currently up, as mortgage applications increased 1% over the past week, according to data from the Mortgage Bankers Association. Needless to say, for anyone worried about entering the market at a seemingly uncertain time, M.B.A. President and CEO Bob Broeksmit assures the data shows relative stability. 

“Mortgage rates remained largely unchanged last week, as markets continued to assess the implications of recent Federal Reserve policy decisions,” Broeksmit says, adding that “while mortgage application activity was mixed, overall demand continues to outpace last year’s levels, reflecting the underlying strength of the housing market. As economic conditions continue to evolve, greater certainty around the interest rate outlook should help foster increased borrower confidence and support sustained housing market activity.” (See mortgage rates in your area here, from our ad partner Bankrate.)

Source: MarketWatch