Happy new year, friends!

Rates Down As Predicted

Mortgage interest rates finally started falling in November 2022, as I had predicted in my November newsletter. Year over year inflation numbers started to come down, which is great news for mortgage rates. A drop in inflation helps reduce treasury bond yields and treasury bond yields set the basis for mortgage rates.

As the Federal Reserve’s interest rate hikes slow down the economy, we will see more declines in the monthly inflation readings which will cause bond yields to drop and mortgage rates to fall. Look for more follow through on falling mortgage rates over the course of the next six months.

What’s Happening with Prime Rate

Despite the improved inflation numbers, the Fed increased it’s target interest rate, the Fed Funds, again on December 14th. This latest rate increasewas .5% and it took the Fed Funds from 4% to 4.5%. This Fed Funds rate only directly affects one consumer interest rate, the Prime Rate, which is always 3% more than the Fed Funds rate.

Effect of Prime Rate on HELOCs

Prime is now at 7.5%,which affects credit card interest rates and Home Equity Lines of Credit, HELOCs. HELOC rates are now at or slightly above the Prime Rate. Counter intuitively, when the Fed Funds rate increases to slow or reverse inflation, mortgage interest rates usually fall because they are not tied to the Prime Rate.

Mortgage rates are tied to the bond market. If you want to see where mortgage rates are going, look at the 10 Year Treasury bond yield. As thebond yield drops, mortgage rates are dropping as well.

Buyers Jumping Back In

After touching a 21 year high in mortgage rates in October 2022, the reversal in the bond market saw an over 1% drop in mortgage rates in November 2022. As this trend of lower mortgage rates increases into the first and second quarters of 2023, there should be some increased home buying activity as more buyers are able to jump back into the market.

The next six months may be the best time to still get a deal on home prices before the lower interest rates start to take hold in the housing market.

Mini Refinance Boom

As mortgage rates continue to fall, I am anticipating a mini refinance boom starting the middle of 2023 and running into 2024.

  • This run on refinances will mainly be for borrowers who took out mortgages in 2022 during the highest rate environment we have seen in 15 to 21 years.
  • Others who may benefit are those who have Private Mortgage Insurance, PMI, and have gained in equity as well as borrowers looking to take cash out of their equity without adding an adjustable interest rate HELOC.

If you want to see if refinancing in the new year is a good option for you, feel free to reach out for a free analysis.

As always, your mortgage guy,
Viral (Vic) Joshi
Home of Real Mortgage Advice®