What the inflation news means for your mortgages
Inflation has been one of the biggest stories of the past two years. Prices have been high, and the inflation rate peaked in June 2022 at 9.1% year-over-year, leaving many families with significantly less purchasing power — despite having the same income. However, the Bureau of Labor Statistics announced today that the inflation rate for October 2023 was 3.2%, which is a significant improvement, but still not quite to the 2% goal set by the Federal Reserve.
Given the new inflation report, you may be wondering how this inflation news will impact you, especially if you have a mortgage or are considering getting a mortgage. Not only could this news impact mortgage rates directly, but it also could impact the decisions made by the Federal Reserve when they meet next month, which has the potential to have a big impact on the mortgage market.
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What the inflation news means for your mortgages
Mortgage rates are impacted by a range of factors, so it is hard to predict exactly how today's news will impact rates. That said, there are some likely outcomes that are worth preparing for.
What if I already have a mortgage?
If you already have a mortgage and are wondering how today's inflation news will impact your finances, the first step is to know what type of mortgage you have: a fixed-rate mortgage or an adjustable-rate mortgage (ARM).
If you have a fixed-rate mortgage, the good news is that your mortgage rate is locked in, and no matter what happens to mortgage rates as a result of the inflation data, your rate will not change. That said, you should still pay attention to how mortgage rates shift both now and in the future. If you bought a house with a mortgage in recent months, you may have a relatively high interest rate. So, if and when rates do go down, you may want to consider refinancing.
On the other hand, if you have an ARM, you need to look closely at the terms of your loan to see whether or not any shifts in rates will impact you. All ARMs start with a period where the rate is set; after that, the rate is adjusted on a set schedule based on the overall rate environment.
This schedule is usually represented by two numbers — the first tells you the number of years the rate is set at the start of the loan, and the second tells you how often the rate is adjusted. For instance, if you have a 7/1 ARM, the rate is set for the first seven years, and after that, it can be adjusted up or down once a year.
If you are within the fixed-rate portion of your loan, any mortgage rate movement won't impact you. If you are not, today's news could impact the rate you get at your next adjustment.
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What if I'm looking for a mortgage?
If you're in the process of buying a home and are looking for a mortgage, today's inflation report could have an impact on the rate you get.
"The Federal Reserve is expected to signal it is not done raising rates at its next meeting even though another pause in rate hikes is expected. The Fed is looking for the bond market to do the rest of the tightening work for it," says Yelena Maleyev, a senior economist at KPMG Economics. "Threading this needle will prove to be a challenge as any additional deceleration in inflation or in employment data could cause bond markets to rally, undoing the Fed's efforts to cool demand."
There is still one more inflation report expected before the next Federal Reserve meeting. While it remains unlikely that the Fed will cut rates, another inflation report showing progress toward the 2% goal could dissuade the Fed from hiking rates in December. On the other hand, a bump in inflation could lead the Fed to hike rates again, something Fed Chair Jerome Powell has made it clear he is willing to do.
If there is another rate hike by the Fed in December, mortgage rates could end up spiking as the year ends. The Fed doesn't set mortgage rates directly, but it does set the federal funds rate. Consumer interest rates, including mortgage rates, generally rise and fall in step with the federal funds rate.
The bottom line
Inflation was down in October, with overall prices increasing just 3.2% year-over-year. This has the potential to impact mortgage rates both directly and indirectly through actions by the Federal Reserve. If you have a fixed-rate mortgage, this won't impact you unless you are enticed to refinance. If you are shopping for a mortgage or have an ARM, though, the data could end up having an impact on the rates you receive.
