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There is no doubt that the mortgage type environment has changed dramatically over the past two years amid problems with stubbornly high inflation. Although mortgage rates were below 3% in early 2021, the resulting rise in inflation prompted the Federal Reserve to embark on an aggressive rate-raising campaign that sent mortgage rates soaring by over 8% by the end of 2023.
And while the Fed's moves have helped moderate inflation somewhat, we're not out of the woods yet. The last two reports showed that inflation has been ticking againand the Fed rate is now on pause at a maximum of 23 years. In turn, borrowing rates remain high, with the average rate on a 30-year fixed mortgage now at 7.36% (as of May 1, 2024), more than double what it was during the peak of the pandemic.
These much higher borrowing costs, along with the current ones high housing prices, have made home ownership much more expensive for buyers, as higher rates mean paying much more interest on the money you borrow. Many would-be homeowners, in turn, have chosen to put their plans on hold, hoping that mortgage rates will eventually come down and make home ownership more affordable. But will mortgage interest rates fall in May? Below, we'll break down what you should know.
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Will mortgage interest rates fall in May?
Earlier this year, many experts predicted that the Fed would do just that start reducing interest rates by mid-2024 as inflation cooled and the economy slowed. This fueled expectations that mortgage rates it could start trending lower in the coming months.
Despite this, now seems unlikely that mortgage rates will drop in May. At its meeting on May 1, the Federal Reserve chose to stop interest rate hikes and leaving the federal funds rate between 5.25% and 5.50%, its highest level since 2001.
The decision to keep rates on hold was driven in large part by the latest inflation data, which showed consumer prices unexpectedly rebounded in February, when inflation increased by 3.2%, and again in March, when the rate rose further to 3.5%. Although these readings were still well below the 9.1% peakthat occurred in mid-2022, they still raised concerns that inflationary pressures could be reaccelerating.
And with inflation proving stickier than expected, the Fed has signaled further rate hikes they are not off the table in the future if price pressures do not moderate further. The central bank remains focused on returning inflation to its 2% target, and is likely to remain proactive until then.
So unless upcoming inflation reports show a clear downward trajectory, mortgage rates are unlikely to drop substantially in May. In fact, mortgage rates could rise further depending on future economic data and the Fed's policy response.
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How to get a lower mortgage rate in the current lending landscape
While we may not see a major mortgage rate drop this month, there are still ways to secure a lower rate if you're buying a home right now. This is how:
Buy mortgage points
You can “downgrade” your mortgage by paying discount points in advance to closure or by rolling them into your global loan. Although it can vary by lender, one point is typically equal to 1% of the loan amount and generally lowers your rate by 0.25%. Buying mortgage points may require you to pay more up front on your loan, but it can make sense if you plan to stay in the home long enough to recoup the costs through lower monthly payments.
Make a bigger down payment
Lenders tend to offer lower rates to borrowers who do a larger down payment, as this reduces your exposure to risk. A down payment of 20% is ideal, but putting 25% or more down can help you get the most attractive rate price, depending on the lender and your overall loan profile.
Improve your credit score
Your credit score is a key factor in the mortgage rate you will receive. Higher scores indicate less default risk for lenders. So, if you're trying to secure the lowest rate possible, focus on paying off your debts, correcting any errors on your credit report, and avoiding new credit inquiries to boost your score before you apply.
Consider an ARM loan
An adjustable rate mortgage (ARM) may offer a lower initial interest rate compared to a 30-year fixed mortgage. However, the rate is only fixed for an initial period, after which it will be adjusted periodically based on market rates. This can make them a risky proposition for certain buyers, but ARM loans can still make sense for those who don't plan to stay in the home long-term or for those who expect rates to drop in the future
Buy thoroughly
Not all lenders offer the same rates, fees and rating standards. Obtaining quotes from various banks, credit unions and mortgage companies it is crucial to ensure you find the most competitive rate and terms available based on your financial profile.
The bottom line
Rates are still well above where they were just a few years ago, and with today's announcement from the Fed, it seems unlikely that mortgage rates will drop in May. That said, there may still be ways for borrowers to secure a lower mortgage rate, even in today's unique interest rate environment. This usually comes down to taking proactive steps and exploring all available options, and following the tips above can also help you make the most of today's less favorable rate environment.
