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What the new inflation report means for mortgages

Rising inflation is likely to further increase costs for home borrowers. Getty Images

The latest inflation figures were released on Wednesday, and if homebuyers were hoping for a positive development, they're going to need to wait a bit longer. Inflation was up to 3.5% in March, up from February's 3.2% rate, and is now a full percentage point and a half above the Federal Reserve's target 2% goal. 

"Over the last 12 months, the all items index increased 3.5 percent before seasonal adjustment," the Bureau of Labor Statistics said in a release. "The index for shelter rose in March, as did the index for gasoline. Combined, these two indexes contributed over half of the monthly increase in the index for all items. The energy index rose 1.1 percent over the month. The food index rose 0.1 percent in March. The food at home index was unchanged, while the food away from home index rose 0.3 percent over the month."

Amid this backdrop, homebuyers may be wondering how the new inflation report affects them. Below, we'll break down what it means for mortgage rates and what buyers can do in the interim.

Consider locking in a mortgage rate here now before they potentially rise higher.

What the new inflation report mean for mortgages

In short, the new inflation report isn't good news for homebuyers or current homeowners looking to refinance. But it doesn't mean that either group is totally out of options, either. 

Elevated inflation will further dampen any Fed efforts to reduce interest rates and after two consecutive months of reports showing an uptick, it's not unrealistic to expect a potential increase this year. One Fed official has already cautioned that cuts could be completely off the table this year — and that was before Wednesday's disappointing report.

"If we continue to see inflation moving sideways, it would make me question whether we needed to do those rate cuts at all," Federal Reserve Bank of Minneapolis President Neel Kashkari said last week in an interview with Pensions & Investments magazine that aired on LinkedIn.

For rates to come down, inflation would theoretically need to drop significantly in the months to come, which seems unlikely following the reports that have been released so far in 2024 (a January report also showed inflation running hotter than anticipated). And until that happens, mortgage rates, already hovering near their highest point since 2000, are unlikely to fall much (or at all). If lenders expect rate hikes to come later in the year, they could start pricing that in now with elevated rate offers to borrowers.

This is why it makes sense for current buyers to act aggressively now — before the price of home borrowing becomes even more prohibitive. After all, today's "high" 7% rate could become tomorrow's "low" one.

See what mortgage rate you could qualify for here today.

How to get a below-average mortgage rate now

In today's market, it pays to be creative. Here are two ways buyers can get a below-average mortgage rate in today's economy:

  • Buy mortgage points. Mortgage points serve as a fee the borrower pays to the lender to secure a below-average rate. This fee can be paid upfront at closing or rolled into the overall mortgage loan, but it can be effective for buyers eager for a lower rate. While you won't necessarily be able to buy a mortgage down to the lows of 2020 and 2021, you may be able to knock half a percentage point off what you otherwise would have secured. That can be a major advantage in any market, but particularly now in the face of overall rate uncertainty. 
  • Consider an adjustable-rate mortgage. An adjustable-rate mortgage will start at one rate right now but adjust over time. The initial rate, which tends to be lower than the prevailing fixed rate, will last for several years (the time frame varies) before adjusting to a different, presumably higher rate. While that can normally be risky, it could be advantageous for buyers right now, particularly those who are confident that rates will have adjusted downward after that initial period has ended (at which point they could refinance into a lower, fixed rate instead).

The bottom line

With inflation on the rise once again, homebuyers looking for some relief will need to get creative. With higher inflation comes diminishing expectations for rate cuts, so buyers should look for other ways to get a lower rate, including buying mortgage points and an adjustable-rate mortgage. Neither option is ideal, but both could save buyers significant sums of money now that the fight against inflation seemingly has to continue a bit longer.

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