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Mortgage Rate Forecast For 2023

Mortgage rates have been on a rollercoaster ride since the beginning of 2023.

Following five consecutive weeks of declines between March and April, mortgage rates rose for two consecutive weeks only to dip again. Now, mortgage rates are back on the rise. The average 30-year, fixed-rate mortgage was 6.57% for the week ending May 25, according to Freddie Mac. That’s up from 6.39% the week prior—and higher than where rates started in 2023.

As rates begin to rise again, housing market watchers continue to hold out hope that mortgage rates peaked last year and will soon resume their steady decline, assuming the Federal Reserve backs off on rate hikes.

What Will Mortgage Rates Do Next? Watch Inflation, Fed for Clues

Rates for home loans remain caught in a tug-of-war between high inflation and the Federal Reserve’s actions to rein in inflation, which often indirectly pushes long-term mortgage rates higher.

The Fed continued its efforts to dampen consumer spending, raising its federal funds rate—the borrowing rate for commercial banks and credit unions—by 25 basis points at its May meeting, the 10th consecutive rate increase. The indirect impact is a 30-year, fixed mortgage rate over 2% higher since the Fed’s first rate hike in March 2022.

Recent data indicates the Fed’s tightening policy seems to be working, though some analysts say too well, given the ongoing turmoil in the banking sector. Nevertheless, headline inflation cooled to 5% in March for the first time in nearly two years and is well below its June 2022 peak of 9.1%. Even so, the current rate is still far above the Fed’s 2% goal.

While the 25 basis point increase came as no surprise, some housing experts criticized the move.

“The latest interest rate hike by the Federal Reserve is unnecessary and harmful,” said Lawrence Yun, chief economist at the National Association of Realtors, in an emailed statement. “(Small regional banks) are becoming zombie-like banks, unable to lend even to good businesses as they are more concerned with balance sheet shuffling for survival. This situation will worsen with each additional rate hike by the Federal Reserve.”

Though many hope the Fed will pause increases moving forward—or even begin implementing rate cuts—the path remains uncertain amid a volatile economy.

“The assessment of the extent to which additional policy firming may be appropriate is going to be an ongoing one, meeting by meeting,” said Federal Reserve Chair Jerome Powell at a press conference following the rate hike announcement. Powell added that the Fed does not expect a smooth path to attaining the 2% goal and that policymakers will need to commit to this process for a while.

On the brighter side, Powell acknowledged that the committee feels its work is much closer to the end than the beginning and signaled that a pause may be in the cards. Though, he put the kibosh on the notion of a rate cut anytime soon. Powell also expressed optimism that avoiding a recession is now ”more likely,” based on recent data.

So what’s the best strategy for prospective homebuyers in this uncertain economic climate?

“Be prepared to jump on a dip in rates,” says Robert Frick, corporate economist at Navy Federal Credit Union. “But only if you have a property in mind that fits your budget.”

Mortgage Rate Predictions for May 2023

Here’s how other experts predict market conditions will affect the 30-year, fixed-rate mortgage in the coming months:

• Freddie Mac chief economist, Sam Khater. “[W]ith the rate of inflation decelerating rates should gently decline over the course of 2023.”

• National Association of Realtors (NAR). “[F]orecasts that … mortgage rates will drop—with the 30-year fixed mortgage rate progressively falling to 6.0% this year and to 5.6% in 2024.”

• Compass U.S. region president, Neda Navab. “There have been signals that mortgage interest rates may be at or near their peak, given recent encouraging news around inflation and a corresponding drop in the U.S. Treasury yields that help set mortgage rates. A sustained drop could push mortgage rates into the 5% range late in the second quarter or in the second half of 2023, but that’s definitely not guaranteed.”

• Zillow Home Loans senior macroeconomist, Orphe Divounguy. “A fight over raising the debt ceiling is likely to drag into the summer, and mortgage borrowers should expect rate volatility as a result.”

• Mortgage Bankers Association (MBA). “Long-term rates have already peaked. We expect that 30-year mortgage rates will end 2023 at 5.2%.”

• Rinaldi Group president, Stephen Rinaldi. “[R]ates will begin [to] slide into the summer, beginning a slow but relatively steady lowering of interest rates.”

What Happens to Mortgage Rates if the U.S. Defaults?

Economists and housing market stakeholders are monitoring the current political battle over the debt ceiling, which hit its limit on January 19, forcing the U.S. Treasury to take measures to extend it to June 5.

The U.S. is only authorized to borrow up to the amount of the debt ceiling limit until Congress agrees to raise it. Otherwise, the country is at risk of defaulting on its financial obligations, which would harm the economy and Americans.

Currently, Democrats and Republicans remain at a standoff. House Republicans narrowly passed a bill that raises the debt ceiling into 2024 but comes with demands for sweeping spending cuts and Biden policy rollbacks. Democrats say the measure is already “dead on arrival” in the Senate, and President Biden has vowed to veto the bill should it cross his desk.

During remarks at a recent conference, Treasury Secretary Janet Yellen warned that a default would lead to an “economic catastrophe,” resulting in higher mortgage payments.

Orphe Divounguy, senior macroeconomist at Zillow Home Loans, said in an emailed statement that a debt limit standoff “could raise borrowing costs, including mortgage rates, thus hampering an already cold housing market.”

Will 2023 Be A Good Time To Refinance?

Any time rates pull back even the slightest amount, more people tend apply for mortgages. With rates still substantially higher than a year ago, however, applications remain stuck near the lowest level in more than two decades, according to MBA data.

While refinancing options can lead to a lower monthly payment, not all of the options yield less interest over the life of the loan. For example, refinancing from a 5% mortgage with 26 years left on it to a 4% rate, but for 30 years, will cause you to pay more than $13,000 in additional interest.

Before you start shopping around for a lender, you can find out how much you could save by using a mortgage refinancing calculator.

You’ll also want to consider how long you plan on staying in your home as the closing costs can eat up your savings if you sell shortly after refinancing. The closing costs to refinance run between 2% to 5% of the loan amount, depending on the lender. So you should plan on keeping your home long enough to cover those costs and realize the savings from refinancing at a lower rate.

Keep in mind that the rate you qualify for also depends on other factors such as your credit score, debt-to-income (DTI) ratio, loan-to-value (LTV) ratio and proof of steady income.

Current Mortgage Rate Trends

The average mortgage rate for a 30-year fixed is 7.20%, nearly double its 3.22% level in early 2022.

The average cost of a 15-year, fixed-rate mortgage has also surged to 6.50%, compared to 2.43% in January 2022.

In the current environment, ARMs might be more affordable than those with fixed rates. The latest average for a 5/1 ARM was 5.92%.

What Do Current Rates Mean For Refinancing in 2023?

After kicking off 2023 at 6.48%, mortgage rates were topsy-turvy throughout the first quarter—and the wild swings continue.

Rates embarked on a downward trend at the beginning of April, but reversed course at the end of May, with the most recent 30-year fixed rate sitting at 6.57% for the week ending May 25.

Refinance applications also rose for the last two weeks in April, according to the MBA. Even so, the MBA notes that refinance activity overall remains at 51% of the previous year’s levels, which makes sense considering the average 30-year mortgage refinance rate was hovering around 5.4% at the end of April 2022.

“Most homeowners still have rates significantly lower than current levels, leaving only a small pool of borrowers with an incentive to refinance,” said Joel Kan, vice president and deputy chief economist at MBA, in a press statement.

Nevertheless, you still may have personal reasons to refinance either now or soon. For example, perhaps you have an adjustable-rate mortgage (ARM) and want to refinance to a fixed mortgage to secure your current rate or nab a lower rate. Because ARM rates fluctuate after the fixed period ends, refinancing to a fixed-rate mortgage can provide more stability as you plan your financial future.

The good news is that, despite elevated rates, there are methods you can employ to help you negotiate rates down enough that refinancing may make sense, especially if you bought a home between mid-October and early November last year when rates were at their pinnacle.

Because there are closing costs and fees associated with refinancing, many mortgage experts say refinancing only makes sense if you can snag a rate that’s at least 1% lower than your current rate.

Here are some actions you can take to whittle down your refinance rate:

• Get rate quote estimates from at least three lenders

• Ask lenders about waiving or reducing closing costs

• Negotiate with your lender to match the best deal

• Take steps to strengthen your credit score

• Save for a larger down payment

• Choose a shorter-term loan

• Lock in the lowest rate

• Buy discount points

Mortgage Rate Predictions for the Next 5 Years

While predicting mortgage rates for the next five years is a tall order, especially considering the unprecedented fluctuations over the past year, experts say the low housing inventory will be a key factor in where rates go over the long term.

“When rates come down, we’re going to be in store for another hot housing market where there are more buyers than sellers jacking up prices because we haven’t solved the problem” of low inventory, says Daryl Fairweather, chief economist at Redfin. “It’s still that affordability problem. That’s going to stay with us.”

As far as which direction interest rates go in the years ahead, Fairweather expects declines. However, the timeline for this downward trend remains uncertain.

“In every scenario, rates are going to come back down,” she says. “It’s just a matter of when.”

However, experts say there are considerations beyond just low inventory that could potentially impact rates and broader housing market conditions in the coming years.

“The big question over the next five years is whether there are exogenous shocks (such as the war in Ukraine) or a rapid change in consumer sentiment that results in far less economic activity,” says Thomas Booker, head of strategy for Candor Technology. “Over this period, I suspect affordability will continue to be a challenge but if consumers can remain employed and constructive on their future—housing will be just fine.”

What Affects Mortgage Rates?

There are a complex set of factors that impact mortgage interest rates, including broader economic conditions, the monetary actions of the Federal Reserve (to some extent) and inflation. However, long-term mortgage rates are directly impacted by the bond market. The rate you’re offered on a mortgage will also depend on the lender you work with, its business costs and your financial profile.

Demand for mortgages can also affect rates, pushing it higher as available capital for lending tightens. Conversely, when there’s less borrower demand—as we’re seeing now due to average interest rates hovering in the 6% to 7% range—lenders might consider offering more competitive rates or other incentives to attract borrowers.

How to Shop for the Best Mortgage Rate

Getting an optimal rate on a home loan can save you a significant amount of money over time. Here are some tips that can help you get the best rate possible for your situation:

• Keep your eye on rates. Mortgage rates are constantly changing. Keeping a close watch will make it easier to find and lock in a better rate.

• Check your credit. When you apply for a mortgage, the lender will review your credit to determine your creditworthiness as well as your interest rate. In general, the higher your credit score, the better your rate will be. To get an idea of where you stand, check your credit before you apply and dispute any errors with the appropriate credit bureau to potentially boost your score.

• Shop around and compare lenders. Consider options from as many mortgage lenders as possible to find the best deal for you. Prospective buyers have saved more than $1,500 over a loan’s term by getting two quotes from lenders, and saved roughly $3,000 when they sought five quotes, according to Freddie Mac.

As seen on Forbes Website