2023 Mortgage Rates:
Will They Rise or Fall

How Will Mortgage Rates Change in 2023?

According to the latest economic indicators and expert forecasts, it is expected that mortgage rates will experience moderate fluctuations throughout 2023.

Greg McBride, the chief financial analyst at Bankrate, suggests a strong likelihood of mortgage rates reaching their peak and declining during the first half of the year. The second half of the year is likely to gradually and consistently decrease in mortgage rates.

As of September 2021, the average mortgage rate for a 30-year fixed loan was around 2.86%, and the 15-year fixed rate was at 2.12%. In 2023, it's predicted that the average mortgage rate for a 30-year fixed loan might rise to around 3.5%, while the 15-year fixed rate could increase to 2.9%.

Factors that Can Cause Interest Rates To Rise In 2023

Inflation

Inflation occurs when the general price level of goods and services increases, thereby reducing the purchasing power of money.

When an economy experiences inflation, the regulatory bodies increase interest rates as a corrective measure to reduce borrowing and the circulation of money.

Sellers will be forced to reduce the cost of their products or services due to the drop in money circulation. Since mortgages are a type of loan, they will also be affected by the general hike in interest rates.

In 2023, if inflationary pressures persist, the Federal Reserve may need to implement monetary policies aimed at controlling inflation, which can indirectly lead to higher mortgage rates.

For instance, the Fed may decide to sell government securities or increase the reserve requirements for banks, which can result in higher interest rates and, subsequently, higher mortgage rates.

Federal Funds Rate

The Federal Funds Rate, determined by the Federal Reserve, has a direct impact on short-term interest rates and an indirect effect on long-term rates like mortgage rates.

If the Federal Reserve opts to increase the Federal Funds Rate in response to inflation or other economic concerns, mortgage rates are likely to follow suit.

For instance, the Federal Reserve Rates were relatively low from 2020 to 2021. Following that, the rates were increased 7 separate times in 2022 due to high inflation. Mortgage rates took the hint and followed suit with the increase in response to the rising inflation.

On March 22, 2023, the Federal Reserve increased the rates by 0.25% due to the recent rise in inflation. This means the mortgage rate is likely to shift upwards soon too.

Economic Growth

When an economy prospers and has a high GDP, applications for loans generally increase. This causes the interest on mortgages and other types of loans to rise because the lenders are more confident that borrowers can repay the loans.

Moreover, robust economic growth can result in higher inflation, which, as previously mentioned, can push mortgage rates higher. If the U.S. economy continues to expand in 2023, we may see increased demand for housing and mortgages, driving up mortgage rates.

Global Economic Factors

International economic events, such as trade disputes, economic crises, or political unrest, can influence mortgage rates in the U.S.

These global events usually lead to uncertainty in the financial markets. For instance, a political election usually has an impact on the currency of a country.

A good scenario is that of an incumbent president afraid of losing the seat. Such a person may try to win over the people by releasing funds to the public. While this may help a mid-country to prosper, it will be fatal eventually because the country's currency value will drop.

If, after the election, the incumbent loses the seat, the new government may pass some policies to increase rates in general. That way, the inflation drops, and the currency's value increases.

Government Debt and Fiscal Policy

The level of government debt and the fiscal policy stance can also influence mortgage rates. If the government increases borrowing to fund stimulus programs or cover budget deficits, it can result in higher interest rates as the supply of bonds in the market increases.

Additionally, expansionary fiscal policies can contribute to higher inflation, leading to a potential rise in mortgage rates.

Will Mortgage Rates Drop Soon?

Although mortgage rates may experience some fluctuations in 2023, there is a possibility of rates decreasing in the latter half of the year if certain conditions are met.

The first three months of the year have so far witnessed an increase in mortgage rates due to the growing inflation. If this continues, the economy may be back to normal before the first half of the year lapses.

Some of the indications that the economy is back to normal include a more stable economy, reduced inflation, and lower long-term bond yields. When these events happen, the Federal Reserve will likely reduce the rates, and mortgage lenders will do the same.

In the unlikely event of bank failures, mortgage rates could experience a short-term drop. Bank failures can create uncertainty in the financial markets, leading investors to seek safety in assets like Treasury bonds.

As demand for these bonds increases, their prices rise, and yields fall, which can translate to lower mortgage rates. However, such an event would likely have negative consequences for the overall economy, and the impact on mortgage rates may not be sustainable in the long term.

It's essential to keep in mind that predicting the exact trajectory of mortgage rates is challenging, as numerous factors can influence their direction. While there is a possibility of a decrease in rates during the second half of 2023, it's crucial to stay informed of the latest economic news and expert opinions to make well-informed decisions regarding mortgages.

How Do Mortgage Rates Influence Home Prices?

Mortgage rates play a significant role in determining the affordability of homes and, consequently, influencing home prices. Understanding the relationship between mortgage rates and home prices can help prospective homebuyers and investors make informed decisions in the housing market.

Where Mortgage Rates And Home Prices Meet

Mortgage rates and home prices are interconnected in several ways:

• Affordability

When mortgage rates decrease, homes become more affordable for prospective buyers since the cost of borrowing reduces. As a result, the increased affordability can generate a surge in demand for homes, which may drive up the prices of houses.

Conversely, higher mortgage rates can make homes less affordable, potentially reducing demand and causing home prices to stagnate or decline.

• Monthly Payments

The interest rate of a mortgage affects the monthly payments of a borrower. When the rates are low, borrowers get lower, affordable monthly payments. Due to that, they may borrow more to take advantage of the rates and buy bigger houses.

However, as more and more people borrow more money, money increases in circulation. Home sellers will then increase their prices to take advantage of the boom.

On the other hand, higher mortgage rates lead to higher monthly payments, which can price some potential buyers out of the market and put downward pressure on home prices.

• Investor Demand:

Mortgage rates can also impact investor demand in the housing market. Lower mortgage rates can attract more investors as the cost of borrowing decreases and the potential return on investment increases. This added demand from investors could contribute to rising home prices.

In contrast, higher mortgage rates may deter investors, reducing competition in the market and potentially leading to lower home prices.

Other Factors Influencing Home Prices

• High demand for houses when there's limited supply or low demand for houses when there's plenty in supply.

• Demographic trends, like population growth, age distribution, household formation, migration patterns, and income distribution, can affect home prices.

For instance, if more people move into an area, there'll be more demand for homes. As a result, sellers may increase their prices, knowing that people will pay.

• Government policies may influence mortgage rates. As a result, home prices may rise or fall, depending on the policies' effect on the rate.

• Consumer sentiments or confidence, which is the level of confidence the people have in their financial status and the economy as a whole, can affect home prices. If people have high confidence, they tend to spend more, and that can cause an increase in demand. Consequently, the price tags of homes increase.

2023 Mortgage And Housing Market Predictions By Experts

Several industry experts and organizations have shared their insights and predictions regarding mortgage rates and the housing market for March 2023. Here's a summary of their opinions:

Compass U.S. Region President, Neda Navab

Neda Navab says mortgage rates are at their highest or near highest at the start of 2023. She says the reduction in inflation and lower U.S. Treasury bonds are likely to drive the rates to 5% or thereabout by the end of the year.

She expects the prices of homes to decrease sometime during the year, but not for long. She proceeds to advise people not to wait for rates to go lower but simply buy whichever house they love and fits into their budget.

Mortgage Bankers Association (MBA)

The Mortgage Bankers Association expects that mortgage rates will rise gradually throughout 2023. They predict that the average 30-year fixed mortgage rate could reach 3.7% by the end of 2023. However, they also note that economic uncertainties and unforeseen events could impact these projections.

National Association of Realtors (NAR) Senior Economist and Director of Forecasting Nadia Evangelou

According to Nadia Evangelou, it's probable that mortgage rates will rise in 2023, although the pace of the increase is expected to be gradual. She highlights the significance of keeping a close eye on inflation and the Federal Reserve's actions, as these elements can considerably impact mortgage rates.

Freddie Mac

Freddie Mac predicts that mortgage rates will experience some fluctuations in 2023 but will generally trend upward. They expect the 30-year fixed-rate mortgage to average around 3.5% by the end of the year.

Realtor.com Economist, Jiayi Xu

Jiayi Xu forecasts that mortgage rates will rise in 2023 due to factors such as inflation and economic growth. He advises potential homebuyers to lock in low rates while they are still available and consider shorter-term loans, such as 15-year fixed mortgages, to save on interest costs.

Zillow Home Loans Senior Macroeconomist, Orphe Divounguy

Orphe Divounguy predicts a lot of fluctuation in the 2023 mortgage rates. He says the possibility of a debt ceiling standoff can raise borrowing costs in general, including mortgage rates. He says, by implication, the slow housing market may take the hit too and become even slower.

In summary, most experts predict that mortgage rates will rise in 2023, although the pace of increase may vary. Potential homebuyers and investors should closely monitor economic indicators, inflation, and the Federal Reserve's actions, as these factors can have a significant impact on mortgage rates and the overall housing market.

What is the Implication Of The U.S. Government Hitting The Debt Ceiling Limit?

The debt ceiling, also called debt limit, is the borrowing limit set by Federal law, indicating the total amount the U.S. federal government can borrow. One of the major implications if the U.S. reaches the debt limit is that borrowing costs will rise, and that includes mortgage rates.

How Are Mortgage Rates Affected?

If the U.S. reaches its debt ceiling and is unable to raise it, the government may need to prioritize its spending, potentially defaulting on some of its financial obligations. This scenario could have several consequences for mortgage rates:

• High uncertainty

To start with, the U.S Federal government hitting the debt ceiling may cause increased uncertainty in the market.

This stems from the possibility that the government may be unable to pay its debts. By default, concerned investors focus on the U.S. Treasury bond because the risks are lower. The bond prices will fall, and as a result, bond yields will rise.

On the other end, borrowing costs may increase for the government in the same way lenders would offer higher interest on loans to a borrower with a low credit score. This affects not only the government but individuals and businesses that rely on loans.

• The decline in Credit Rating

If the U.S. government's credit rating is downgraded due to a debt ceiling crisis, borrowing costs could increase for the government and, indirectly, for consumers. A credit rating downgrade could result in higher interest rates on U.S. Treasury bonds, pushing mortgage rates higher.

• The decline in Economic Growth

A debt ceiling crisis could lead to an economic slowdown or even a recession if the government is forced to cut spending dramatically or default on its obligations.

An economic downturn could result in job losses and reduced consumer spending, which could negatively impact the housing market and potentially lead to higher mortgage rates as lenders try to mitigate risks.

Precedent: The 2011 Debt Ceiling Crisis

During the summer of 2011, the U.S. government hit the debt ceiling and could no longer borrow loans to finance its operations. Due to this, the government asked Congress to raise the limit so it could borrow more money to fulfill its obligations. As it were, the limits could only be raised if both the house of reps and Senate pass the bill and the president signs it.

An argument followed with the house of reps placing a condition on the debt ceiling raising. The house of reps gave the condition that spending be cut significantly if the government wanted to increase the borrowing limit. But, the President and Senate insisted that revenue and spending cuts increase.

During this crisis, there was agitation in the market, with investors losing confidence in the government's ability to repay its debt. Investors sought safety in Treasury bonds, causing interest rates to rise ultimately.

After months of arguing, the two opposing sides reached a compromise that birthed "The Budget Control Act of 2011". The debt ceiling was raised by 2.1 trillion, and spending cuts of $1.2 trillion, spread over 10 years, were added.

What Does a Mortgage Rate Lock Mean?

A mortgage rate lock is an agreement between a lender and a borrower whereby the borrower pays a lender a certain fee to stick to a certain interest rate for a specific period.

This agreement protects the borrower from potential fluctuations in mortgage rates during the loan application process, providing stability and predictability for their future mortgage payments.

Purpose of a Mortgage Rate Lock

Mortgage rates are subject to daily changes, and sometimes, they may change several times in a day. The factors that influence these changes include economic indicators, market conditions, and central bank policies.

This can pose a significant challenge for borrowers as it becomes difficult to accurately estimate the total cost of their mortgage and manage their finances accordingly.

A mortgage rate lock offers protection against these fluctuations, ensuring that the borrower will receive the agreed-upon interest rate, regardless of market changes, as long as the loan is closed within the lock period. This can help borrowers budget more accurately and avoid any unexpected increases in their mortgage payments.

Elements Involved In A Mortgage Rate Lock

A mortgage rate lock typically includes the following components:

• Locked Interest Rate: The specific interest rate the borrower and lender agree upon for the mortgage loan.

• Lock Period: The duration for which the rate lock agreement is valid, usually ranging from 30 to 60 days, although longer lock periods may be available for an additional fee. The lock period should be long enough to allow the borrower to complete the loan application and closing process.

This is because if closing exceeds the lock period, the borrower may forfeit the locked interest rate. That is why it is advisable that a borrower picks a lock period enough to process the loan application and closing process.

• Lock Fees: Some lenders may charge a fee for locking in an interest rate, especially for longer lock periods. This fee may be a flat amount or a percentage of the loan amount.

• Lock Expiration Date: The date on which the rate lock agreement expires. If the borrower does not close their loan by this date, they may need to renegotiate a new rate lock agreement or accept the current market rate.

In summary, a mortgage rate lock is an agreement between a borrower and a lender that secures a specific interest rate for a mortgage loan during the loan application process. It protects borrowers from fluctuations in mortgage rates and helps them plan their finances with greater certainty.

How Does a Mortgage Rate Lock Work?

Understanding how a mortgage rate lock works can help borrowers navigate the homebuying process more effectively and make informed financial decisions.

Steps in the Mortgage Rate Lock Process

1. Shop Around And Make A Rate Comparison: Before locking in a mortgage rate, borrowers should research and compare rates from multiple lenders. This can help them identify the most competitive offers and make an informed decision about which lender to work with.
2. Choose A Suitable Lender and Loan Program: Once the borrower has identified a lender and a suitable loan program, they can proceed with the mortgage application process. The lender will provide the borrower with a Loan Estimate, which outlines the estimated interest rate, monthly payments, and other costs associated with the loan.
3. Ask for a Rate Lock: Once the borrower finishes the offer review, they can ask for a rate Lock from the lender. They must reach an agreement with the lender then both parties sign a rate Lock agreement to seal the deal. The document usually shows the locked interest rate, lock period, applicable fees, and the lock expiration date.
4. Underwriting Process and Decision: During the underwriting process, the lender contracts an underwriter to evaluate the financial capabilities of the borrower. If the borrower satisfies the lender's requirements and conditions, the underwriter approves the loan.

Conversely, the underwriter may deny the loan application if the borrower fails to meet the lender's requirements.

5. Closing the Loan: The borrower must close the loan within the lock period to secure the locked interest rate. If the loan is not closed by the lock expiration date, the borrower may need to negotiate a new rate lock agreement or accept the current market rate.

It's crucial to maintain communication with the lender and provide any requested documentation promptly to avoid delays in the closing process.

Note: For additional fees, some lenders allow borrowers some flexibility with the mortgage lock rate agreement. They offer a floating rate lock which allows the borrower to lock in lower rates when mortgage market rates fall during the lock period.

When Is the Best Time To Lock My Mortgage Rate?

Deciding when to lock in a mortgage rate is an important decision that can impact your overall mortgage costs. By understanding the factors to consider when locking in a rate, you can make an informed decision that suits your unique financial situation.

Consider These Factors When Locking A Mortgage Rate

• Market Rate Trends: One of the best times to lock in a mortgage rate is when there's a high possibility that the rates will increase soon. For this to work, you must keep an eye on the market trends. When there are signs that the rates will increase soon, lock in the rates to escape the coming heat.

• Economic Indicators: Monitor economic indicators such as inflation, employment data, and Federal Reserve announcements, as they can influence mortgage rates. By staying informed about the economic landscape, you can make a more educated decision about when to lock in your rate.

• Loan Application Timeline: When considering your loan application and closing timeline, securing a rate that allows sufficient time for the entire application process, including underwriting and closing, without surpassing the lock period is important.

If you foresee any possible delays, it's recommended that you opt for a more extended lock period to prevent forfeiting your locked rate.

• Personal Financial Situation: Assess your personal financial situation and risk tolerance. If you prefer the stability of a fixed rate and can afford the current rates, locking in a rate may be a suitable option.

However, if you are comfortable with some level of uncertainty and are willing to take the risk of rates decreasing, you might choose to float your rate.

When Should You Lock In Your Mortgage Rate?

There's no universal answer as to the right time to lock in your mortgage rates. The answer depends largely on your own situation. In any case, however, the guides below should assist you in making an informed decision;

• At the start of the loan application: This works when you foresee an increase in the mortgage rates soon. Locking early into the application protects you from a potential rise in the rates.

However, starting early usually demand that you lock the rates for a longer period. If not, the lock period may end before you finish the processing, causing you to lose the locked rate.

• After The Lender Pre-approves Your Application: If you have been pre-approved for a mortgage, you may choose to lock in your rate soon after, particularly if you expect to find a property and close the loan within the lock period.

• When Rates are Favorable: If mortgage rates are at historically low levels or you expect them to increase soon based on economic indicators, locking in your rate can help you secure a more favorable rate for your mortgage.

What If The Rates Fall After You Lock In A Rate?

If interest rates fall after you lock in your rate, you might wonder what options are available to you. Here are some scenarios and potential courses of action:

Scenario 1: A Slight Decrease In Rates

A slight fall in mortgage rates should not discourage you from locking in a rate. This is because there is no assurance that the rate will continue to fall in the near future.

Pursuing a lower rate may not be worthwhile due to the associated costs and efforts required. So, when faced with this situation, you can proceed to lock your rate as planned.

It's crucial to keep in mind that mortgage rates tend to fluctuate frequently, and attempting to time the market precisely can be a daunting task.

Scenario 2: Significant Decrease In Rates

If interest rates decrease significantly after your rate lock, you have a few options:

1. Negotiate with Your Lender: Contact your lender to discuss the possibility of adjusting your locked rate to a lower rate. Some lenders might be willing to renegotiate the rate lock agreement, particularly if the decrease is substantial and they want to maintain a good relationship with the borrower.

However, keep in mind that lenders are not obligated to revise a rate lock agreement, and they might charge additional fees for any changes.

2. Take Advantage Of A Floating Rate Lock: In case your rate lock agreement comprises a float-down provision, you can leverage this feature to obtain a lower rate. Essentially, a float-down option enables borrowers to secure a reduced rate if market rates decline during the lock period.

However, it's important to note that this option generally comes with extra fees. Therefore, weighing the potential savings from a lower rate against the additional costs associated with the float-down option is crucial.

3. Cancel the Rate Lock and Switch Lenders: If your lender is unwilling to renegotiate your rate lock agreement and you don't have a float-down option, you could consider canceling the rate lock and switching to another lender who offers a lower rate.

However, this option can be risky, as you might face additional costs, such as application and appraisal fees, and there's no guarantee that the new lender will approve your loan or that rates won't increase by the time you lock in with the new lender.

Potential Risks And Costs

Before making a decision on whether to pursue a lower interest rate after locking in a rate, it is crucial to watch out for the risks and costs involved;

• Extra charges may apply for renegotiating the rate lock agreement or utilizing a float-down option.

• Asking for a renegotiation or switch to a float rate lock may extend the loan processing time. This may cause your lock period to end before you close the home.

• When switching from an unyielding lender to a new one or pursuing a lower rate, there's a possibility that the market rates increase. This jeopardizes your goal of saving some money and may even cost you more.

The Implications of The Current Mortgage Prediction on Refinancing in 2023

As mortgage rates fluctuate over time, it's crucial for homeowners to understand how current mortgage rate predictions might impact their refinancing decisions in 2023.

Current Mortgage Rate Predictions for 2023

The projected mortgage rates for 2023 suggest that they are likely to remain steady, with a possibility of slight fluctuations in either direction. This will depend on several factors, including inflation, Federal Reserve policies, and economic indicators.

Nevertheless, it's crucial to bear in mind that these predictions are not set in stone and can be impacted by changing circumstances, such as unexpected economic or geopolitical developments.

Implications for Refinancing in 2023

Given the current mortgage rate predictions, homeowners considering refinancing in 2023 should keep the following factors in mind:

1. Timing: As you watch the market trends unfold, look out for when mortgage rates are low and may increase in the near future. During that time, it will be in your best interest to refinance your mortgage with a loan offering a lower interest rate.

Conversely, if there are predictions of a fall in rates, it is best to stay put and keep monitoring the market.

2. Savings: Calculate and compare how much you can save from sticking to your current rate over time and potential savings from refinancing. Ensure to consider the cost of refinancing too while at it. After determining the potential gains of your options, choose the one with the greater gain.
3. Loan Term: Refinancing can also be an opportunity to change your loan term, either by shortening it to pay off your mortgage faster and potentially save on interest or by extending it to reduce your monthly payments. Consider your financial goals and priorities when deciding on a new loan term.
4. Cash-Out Refinancing: If you have built up significant equity in your home, you might consider a cash-out refinance, which allows you to borrow more than your existing mortgage balance and receive the difference in cash.

This option can be beneficial if you need funds for home improvements, debt consolidation, or other purposes. However, be cautious about using your home equity for non-essential expenses, as it could put your home at risk if you struggle to make payments in the future.

5. Credit Score and Debt-to-Income Ratio: Ensure that your credit score and debt-to-income ratio are in good standing before applying for a refinance. Lenders typically offer better interest rates to borrowers with higher credit scores and lower debt-to-income ratios.