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What the new inflation report means for mortgages (and what to do about it)

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Increased inflation is likely to cause another hike in mortgage interest rates. Grace Cary/Getty Images

Following months of encouraging signs that inflation was cooling, there have now been two consecutive reports showing it rising again. The latest report, released Wednesday, showed inflation rising by 3.7% in August. The Consumer Price Index (CPI) jumped 0.6%, according to the Labor Department. The core CPI, which doesn't account for food and fuel costs, increased 4.3% from one year ago. 

The news comes ahead of a new Federal Reserve meeting next week. The report could affect the decisions to come out of that policy meeting, although many experts think the Fed will keep interest rates unchanged, for now. That said, higher inflation has often led to higher interest rates meant to combat it. Federal Reserve Chairman Jerome Powell has already hinted at additional rate hikes to come. And if rates don't go up in September, with today's report in mind, they're likely to increase again later this year.

So what does this mean for mortgages and homebuyers? And what can those in the market for a new home do about it? Those are the questions many are asking themselves now. If you're in the market for a new home then start exploring your mortgage rate options here now to see what you could secure before any future rate hikes.

What the new inflation report means for mortgages

An increase in inflation likely means an adjustment to the benchmark interest rate, which, in turn, affects mortgage interest rates. The benchmark rate is currently sitting at a 22-year high at a range between 5.25% and 5.50%. The average mortgage interest rate for a 30-year loan is 7.42% as of September 13, 2023. But if the benchmark rate goes up, as it almost assuredly will now, the rate for a 30-year mortgage will head upward with it.

"We are attentive to signs that the economy may not be cooling as expected," Powell said last month at an annual conference of central bankers. "We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective."

That said, interest rates change daily and your credit profile and other factors will affect the rate you get. See what mortgage rate you could qualify for here now.

What homebuyers can do now

Higher rates aren't any buyer's preference. But there are still some things they can do to minimize the economic impact. Here are three things buyers can still do now:

  • Lock in today's rate. Today's "high" 7.5% mortgage rate could be tomorrow's "low" 7.5% rate. So don't wait for any immediate relief. Lock in the best rate you could get now or you could be sorry. You can always refinance to a lower rate in the future — or you could potentially unlock and relock a lower one if it becomes available before you close on your loan. Just don't wait and hope for something better when all signs are pointing toward another rate hike.
  • Buy mortgage points. Mortgage points act as a fee borrowers pay to a lender to secure a lower rate than what's usually available. So, think 7.5% without points and 7.25% with them, using today's figures for reference. It may not be a huge difference each month, but that extra available funding will add up over time. Just make sure you're planning on staying in the home long enough to recuperate the costs of paying for points. Otherwise, it may not be worth it for you.
  • Get an adjustable-rate mortgage. An adjustable-rate mortgage is exactly what its name implies: Rates will adjust over the life of your loan. While that may not always be preferable, it could be advantageous now if it means you'll secure a lower rate than what's available with the locked-in alternative. Just be cautious about using this mortgage type as rates can, and likely will, rise in the future, leading to additional expenses down the line.

The bottom line

With inflation still humming along in the background, homebuyers need to be smart about their options. While the interest rates from 2020 and 2021 are unlikely to return anytime soon (especially after inflation increased over the summer), there are some steps buyers can still take now. This includes locking in a rate now before they go even higher. But buyers should also consider buying mortgage points to get a lower rate. An adjustable-rate mortgage may also be worth pursuing if it means starting with a lower rate than what otherwise may have been available.

Get started here now!

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