By Don DeBat

15-Jul-24 – Freddie Mac’s Primary Mortgage Market Survey reported on July 11 that benchmark 30-year fixed home loans averaged 6.89 percent nationwide, down from 6.95 percent a week earlier.

A year ago, the 30-year fixed loan rate averaged 6.96 percent. The survey charts average contract interest rates of 30-year fixed-rate mortgages with conforming loan balances of $766,550 or less.

Noting recent reports that show the labor market and inflation are continuing to cool, Federal Reserve Chair Jerome Powell said on July 9 that “more good data” could open the door to interest rate cuts as soon as September.

At its June meeting, the Federal Reserve left its benchmark Fed funds rate unchanged at 5.25 to 5.5 percent – the highest in 23 years. The Fed penciled in only one rate cut in 2024, versus its previous forecast of three cuts this year.

Inflation in the United States cooled in June for a third straight month to 3 percent, down from 3.3 percent in May, but still higher than the Fed’s 2 percent target rate.

Speaking at a hearing of the U.S. Senate’s Committee on Banking, Housing, and Urban Affairs, Powell noted that the Fed is concerned with the risks of waiting too long to cut rates.

The next “likely direction seems to be that we loosen policy at the right moment,” said Powell (left), adding that he believed it would be unlikely for the Fed to increase rates at its next meeting.

Should inflation remain low through the summer, most economists expect the Fed to begin cutting its benchmark rate by 0.25 percent in September, which could push 30-year fixed mortgage rates into the 6.5 percent range.

“Following June’s jobs report, which showed a cooling labor market, the 10-year Treasury yield decreased this week and mortgage rates followed suit,” said Sam Khater, Freddie Mac’s Chief Economist.

On July 12, the 10-year Treasury yield, which is used to monitor the Fed funds rate, eased to 4.21 percent from 4.28 percent.

“We’re also seeing more home listing inventory on the market, including a fair number of listings with price cuts, which is an encouraging sign for prospective buyers,” said Khater (right).

The Freddie Mac survey also reported on July 11 that average 15-year fixed mortgage rates eased to 6.17 percent from 6.25 percent a week earlier. A year ago, the 15-year fixed-loan average was 6.30 percent.

The survey is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who place a 20 percent down payment and have excellent credit.

Adjustable-rate option

However, there is another road to homeownership – the affordable adjustable-rate mortgage (ARM).

An ARM typically starts with a fixed interest rate for a set period, and then adjusts at intervals. ARMs come in different options in which the interest rate is set for three, five, seven, or ten years.

After the initial fixed-rate period, the rate can adjust in six-month or 12-month intervals depending on market conditions. The adjustments are based on an index, such as Treasury yields, or a Secured Overnight Financing Rate (SOFR), and the lender’s profit margin also is tacked on.

If a home buyer takes out a five-year ARM, the interest rate is locked for that initial period. After five years, the rate can adjust with the index rate every six months or each year thereafter.

ARMs are a roll of the dice. Consumer advocates say borrowers should worry that interest rates may go up over time, and that would mean payments could increase, or negative amortization could occur, causing the loan balance to grow. However, rates can also go down over time. At that time, it might be a good idea to refinance and lock in a fixed-rate loan.

Experts say that if you are likely to move in five to seven years, and the residence you are looking to buy won’t be your “forever home,” an ARM may make a lot of sense.