What the latest inflation numbers mean for mortgage rates

Those who were hoping for an end to inflation — and high interest rates — may have to wait a bit longer. 

That was the sentiment early Tuesday after the latest inflation report showed inflation rising 3.1% year over year. While that January rise was lower than December's 3.4%, it was still a move in the wrong direction, strongly indicating that interest rate cuts that seemed almost imminent a few months ago will be delayed until later in 2024. 

"The index for shelter continued to rise in January, increasing 0.6 percent and contributing over two-thirds of the monthly all items increase," the Bureau of Labor Statistics said in a press release. "The food index increased 0.4 percent in January, as the food at home index increased 0.4 percent and the food away from home index rose 0.5 percent over the month."

While elevated inflation and corresponding rates have been a boost for savers, they've been detrimental for borrowers, particularly those looking to buy a home. But what do the latest inflation numbers mean for mortgage rates? That's what we'll break down below.

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What the latest inflation numbers mean for mortgage rates

The latest inflation numbers aren't likely to have a significant, immediate impact on mortgage rates, but they're not likely to lower them in any material way either. Toward the end of 2023, inflation was dwindling and hope was high that interest rate cuts could come as soon as March 2024. Mortgage rates benefited from that optimism and dropped by around half a point, even with the benchmark interest rate unchanged at a range between 5.25% and 5.50%. 

But that was before the December 2023 report and, now, the January 2024 one, showed inflation above 3% — more than a full percentage point above the Fed's target 2% goal. So don't expect optimism to result in another drop in mortgage rates, at least not until more data is revealed — or until the Fed meets again in March.

Even when that happens, however, an interest rate cut may not be as likely as once hoped. 

"And we, you know, want to see more evidence that inflation is moving sustainably down to 2%," Fed chairman Jerome Powell recently told CBS News prior to Tuesday's report. "We have some confidence in that. Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates."

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What homebuyers should do now

Today's inflation report delays any real improvement to mortgage rates, but there are still some steps buyers can take now. While none will secure them a rate close to the 3% range from the recent past, they can still save money, especially over the typical 30-year mortgage loan term. Here are three major things homebuyers should consider doing now:

• Lock in a rate: If your credit is in top shape and you're ready to act, consider locking in a rate now, even if it's higher than you'd prefer. You could always unlock it and lock in a newer rate, if available, before closing. Or you could refinance to a better one in the future. But by locking in a rate now you guarantee, at a minimum, that your rate won't rise any higher.
• Apply for an adjustable-rate mortgage: An adjustable-rate mortgage will rise over time (hence the name) but it could be a smart way to get a lower rate right now. And if the market improves when that rate expires in a few years, buyers can simply refinance into the lower, locked rate at the time.
• Buy mortgage points: Mortgage points serve as a fee the buyer pays to the lender to secure a lower rate - either paid at closing or rolled into the overall mortgage loan. While points won't lower your rate dramatically (think 6.50% today with points versus 7% without them), every dollar helps, particularly in today's economy.

The bottom line

Homebuyers hoping for interest rate cuts may have to wait a bit longer following Thursday's disappointing inflation report. But while rates aren't where most buyers hope they'd be there are still ways to secure a below-average one. So consider locking in a rate today before they potentially rise further and look into an adjustable-rate mortgage versus a fixed one and, finally, talk to your lender about buying mortgage points. There is no perfect solution to today's complex rate environment but by taking these steps buyers can improve their chances of getting a cost-effective loan, despite the latest inflation news.