Homebuyers hoping for lower mortgage rates in May may have to wait a little longer for that to happen. Getty Images
There's no question that the mortgage rate environment has changed dramatically over the past few years, with stubbornly high inflation remaining an issue. While mortgage rates were hovering below 3% in early 2021, the resulting rise in inflation prompted the Federal Reserve to launch an aggressive rate hike campaign, causing mortgage rates to soar to over 8% by late 2023.
And while the Fed's actions have helped tame some inflation, we're not out of the woods yet. Several recent reports have shown that inflation is rising again, and the Fed's interest rates are currently paused at a 23-year high. As a result, borrowing rates remain high, with the average rate on a 30-year fixed mortgage now standing at 7.36% (as of May 1, 2024), more than double what it was at the height of the pandemic.
These sharply increased borrowing costs, combined with today's soaring home prices, have made home buying much more expensive for buyers, as rising interest rates mean paying much more in interest on borrowed money. As a result, many would-be home buyers have chosen to put their plans on hold in the hope that mortgage rates will eventually fall, making homeownership more affordable. But will mortgage rates fall in May? Here's what you need to know.
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Will mortgage rates fall in May?
Earlier this year, many experts predicted the Fed would begin cutting interest rates by mid-2024 as inflation subsided and the economy slowed. This raised hopes that mortgage rates could start trending lower in the coming months.
But mortgage rates don't seem likely to fall in May. At its May 1 meeting, the Federal Reserve Board decided to pause interest rate hikes and keep the federal funds rate unchanged at 5.25% to 5.50%, the highest level since 2001.
The decision to keep rates unchanged was primarily driven by the latest inflation data, which showed that consumer prices unexpectedly rebounded in February, with inflation rising to 3.2%, and then picked up further in March to 3.5%. While these figures are still well below the peak of 9.1% recorded in mid-2022, they still raise concerns that inflationary pressures could accelerate again.
And with inflation proving to be stronger than expected, the Fed has signaled it may consider further rate hikes in the future if price pressures do not ease further. The Fed remains focused on getting inflation back to its 2% target and is likely to remain aggressive until that point.
Therefore, unless upcoming inflation reports show a clear downward trend, mortgage rates are unlikely to fall significantly in May. In fact, depending on upcoming economic data and the Fed's policy response, mortgage rates may rise further.
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How to lower mortgage rates in today's borrowing environment
While we aren't seeing any big drops in mortgage rates this month, if you're buying a home right now, there may still be ways to secure a lower interest rate. Here's how.
Buy mortgage points
You can “lower” your mortgage interest rate by paying discount points up front at closing, or by rolling the discount points into your total loan amount. Discount points vary by lender, but typically one point equals 1% of your loan amount and lowers your interest rate by 0.25%. Purchasing mortgage points may increase the amount of your loan up front, but it makes sense to buy discount points if you plan to stay in your home long enough to recoup the costs through lower monthly payments.
Pay a larger down payment
Lenders typically offer lower interest rates to borrowers who make larger down payments because it reduces the borrower's risk. A 20% down payment is ideal, but depending on the lender and your overall borrowing profile, putting down 25% or more can qualify you for the most attractive interest rates.
Improve your credit score
Your credit score is a key factor in the mortgage rate you receive. A higher score means a lower risk of default for lenders. So if you want to secure the lowest possible interest rate, focus on boosting your score before you apply by paying down debt, correcting errors on your credit report, and avoiding new credit inquiries.
Consider an ARM loan
Adjustable rate mortgages (ARMs) may offer lower initial interest rates than 30-year fixed mortgages. However, the rate is only fixed for the initial period and then adjusts periodically based on market rates. That can make them a riskier proposition for certain buyers, but for those who don't plan on staying in their home long-term or who expect interest rates to fall in the future, ARM loans still make sense.
Do an in-depth shop
Not all lenders offer the same interest rates, fees, and qualification criteria. Getting quotes from multiple banks, credit unions, and mortgage companies is important to find the most competitive rates and terms based on your financial situation.
Conclusion
Interest rates are running at levels well above where they were a few years ago, and today's announcement from the Federal Reserve makes it seem unlikely that mortgage rates will fall in May. That said, there may still be ways for borrowers to lower their mortgage rates in today's unusual interest rate environment. Typically, it comes down to taking proactive steps and exploring all available options. And by following the tips above, you may be able to make the most of today's less-than-favorable interest rate environment.
Angelica Leicht