Interest rates are always a hot topic, and with mortgage rates predicted to fall in next year or so, it’s more important than ever to stay ahead of the curve.

The Mortgage Bankers Association predicts that by the end of 2023, mortgage rates will be close to 5%, today the average rate on a 30-year fixed mortgage is 6.65%.

If you’re in the market for a new home or are considering refinancing your mortgage, it’s crucial to understand where interest rates are headed.

In this post, we’ll explore the current mortgage rate predictions for 2023 and provide tips on getting the best deal on your loan. So, what do you need to know? Keep reading to find out!

Expected Mortgage Rate Trends for 2023

Overview of the Mortgage Market in 2023

What can you expect from the market in 2023?

As far as home prices are concerned, they’re expected to fall by 5% nationwide. However, this number will vary depending on the location – and certain hot markets/localities will experience price increases by as much as 5-6%.

What Factors Will Affect Mortgage Rates in 2023?

The mortgage rate is the price of credit given by the lender to the borrower.  Many factors influence the mortgage rate. They include the health of the economy, inflation, the Fed’s monetary policy, and global events, as well as the borrower’s credit and loan type selected.  We discuss the economy and Fed Policy first, below.

Federal Reserve

The Federal Reserve is a market mover when it comes to mortgage rates. They make decisions about the federal funds rate and how much money to print, and these decisions will, in turn, have an impact on mortgage rates. The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis – so while control of the federal funds rate does not give the Federal Reserve direct command over mortgage rates, there are myriad ways that the Federal Reserve can influence mortgage rates.

Movement in the federal funds rate will impact rates that lenders charge. It will have the greatest affect on short-term and variable interest rates, though it will also have some impact on much longer duration loans, i.e. a 30 year mortgage.  Additionally, the Federal Reserve may influence the markets just as much by purchasing (or refraining from purchasing) mortgage-backed securities.  By purchasing mortgages, the Federal Reserve can add substantial demand to the mortgage marketplace, and increasing the number of buyers that are in the market competing to purchase mortgages will generally translate lower rates.  The Federal Reserve was a massive buyer of mortgages in 2020 and 2021, buying $40 Billion in mortgage backed securities each month.  In 2022, the Federal Reserve exited the market in an attempt to reduce inflation as home prices continued to rise.  We know they are willing to step in a start buying mortgage bonds again (as they did in 2012 and again in 2020) if the economy weakens.

Inflation

Inflation also does not directly move mortgage rates, but it certainly does influence them indirectly. For example, if inflation is high, the Federal Reserve is likely to raise the federal funds rate to combat inflation, which can indirectly lead to higher mortgage rates.  Additionally, those who invest in mortgages will seek a higher return on their investment when inflation is running high, seeking a return that keeps pace with (or ideally exceeds) the pace of inflation.

Next year, price increases will likely moderate as we see sluggishness possibly build throughout the economy.

Prices for goods have been relatively stable over the last month, which hopefully indicates a break in the trend of extraordinary price growth.
 

Unemployment

Happy Couples Holding Their Dream House In Their Hands

Additionally, the Federal Reserve expects the unemployment rate to rise slightly in 2023, which could put pressure on the Federal Reserve to reduce the federal funds rate. The Federal Reserve System has a dual mandate, to pursue: 1) maximum employment, and 2) price stability.  Consequently, unemployment rates and mortgage rates historically have an inverse relationship, as the Federal Reserve will typically reduce the federal funds rate when the unemployment rate rises to help jumpstart the economy and create jobs.  Hence, as a general rule of thumb, when unemployment rates rise mortgage rates will decrease and vice versa.

Global Events

Another way global events can affect mortgage rates is if there is an increase in economic uncertainty. This can happen when there is a natural disaster or political unrest in another country. When this happens, investors tend to flock to the safety of US Treasury Bonds, which drives up bond prices (drives down yields) and, in turn, will typically result in lower mortgage rates.  When yields on US Treasury Bonds are lower, the mortgage rates required to induce investors to purchase mortgages instead of Treasuries also decreases.

Type of Mortgage

Your mortgage type affects your mortgage rate. For example, with a fixed-rate mortgage, the interest rate is locked in for the life of the loan and cannot change. However, with an adjustable-rate mortgage, the interest rate can change periodically, which means that your monthly payments could go up or go down.  Also, rates on government backed (FHA and VA) loans will generally differ from rates on Conventional or Jumbo mortgages.

The Length of Your Mortgage

The length of your mortgage will determine how long you have to pay off your loan. A shorter mortgage will, of course, come with higher monthly payments, but you will generally offer a lower interest rate.

How to Get the Best Mortgage Rates?

Here are a few tips to help you get started:

  • Work with a mortgage broker instead of a bank. Mortgage brokers have access to various lenders and can help you find the best mortgage rate.
  • Ask about discounts. Some lenders offer discounts on certain fees for certain groups of people, such as veterans, first responders and educators.
  • Get guidance from a mortgage professional on selecting the loan product that is right for you.

Harborside Home Loans can guide you to secure the right mortgage program and help you get the best possible rate and payment. Contact us to learn more.