Mortgage rates are on the rise
The start of the year saw another drop in mortgage rates, with the average 30-year fixed rate falling to 2.65% — its lowest low ever, according to Freddie Mac.
But then interest rates reversed.
The average 30-year mortgage rate spiked to 2.79% on January 14, per Freddie Mac’s survey. Other sources reported averages as high as 2.88% on the same day.
Experts predict rates will keep on climbing in 2021.
The change should be modest — with 30-year rates in the mid-3% range, at worst — but the heyday of new record lows every week could be ending.
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Just how much did mortgage rates rise?
There’s no question mortgage interest rates are ticking up. But how much they’ve increased depends on who you ask.
Freddie Mac, the industry’s go-to for current mortgage rates, reports a relatively modest spike of 0.14%. It also showed rates pushing downward until last week.
But other sources paint a different picture.
Mortgage News Daily, for one, was already reporting 30-year rates at 2.86% on the same day Freddie listed its lowest-low of 2.65%.
So which source is right? Both of them are, in a way.
Differences in rate reporting are common due to companies’ different survey practices. They can also vary based on whether the source looks at purchase or refinance mortgages.
Remember that in the third quarter of 2020, the Federal Housing Finance Agency (FHFA) instituted an Adverse Market Refinance Fee of $500 per $100,000 borrowed — which has led to higher rates on most refinance loans.
The other thing to keep in mind is that rates in the news are averages. That means borrowers with good credentials can often still get lower rates than what’s shown.
So even though interest rates have ticked up, the ultra-lows of the last few weeks aren’t completely gone.
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Why are mortgage rates going up?
The short answer is that mortgage rates are going up because the economy is starting to have a more positive outlook on post-COVID recovery.
Coronavirus has been the major force keeping rates low over the past year. The closer we get to widespread vaccination — and the better our economic outlook as a result — the higher rates will go.
Although the U.S. is still at a critical stage with the virus, and far from tangible recovery, we’re finally starting to see a path forward.
This is largely due to Biden’s win, as well as the Georgia runoff election in which Democrats Raphael Warnock and Jon Ossoff won Senate seats.
The impact of Biden and Senate Democrat wins
Current mortgage rate movements are due partly to the fluidity of the political and economic situation in the U.S., as the country prepares for a transition from the Trump administration to the Biden White House on January 20.
President-Elect Joe Biden has signaled that he wants to implement a $1.9 trillion stimulus plan to jumpstart the economy, and the Democratic wins in Georgia give him a Senate majority that will likely aid his efforts.
Although Biden’s proposed stimulus plan has drawn criticism that relief checks of even $2,000 are unlikely to do much for the economy, the aim of the plan is to ease the country’s economic burden and spur spending and growth.
Economic growth would likely raise mortgage rates as different sectors rebound.
Mortgage Professional America Magazine also reported that stimulus spending could increase inflation, which would drive up mortgage rates as well.
Keeping an eye on the 10-Year Treasury
Eli Sklar, senior loan consultant with loanDepot, pointed to the Ten-Year Treasury as an indicator of an improving economy and a signal that rates will rise in the coming year.
“The Ten-Year Treasury’s price, which is a big indicator of mortgage rates, is inversely related to how the market is doing. As the market continues to do well, the Ten-Year Treasury’s value goes down because the Ten-Year Treasury is known as the safest investment,” Sklar said.
A spike in investor interest in the Ten-Year Treasury as the economy cratered last year, combined with the Federal Reserve’s commitment to keep interest rates low, drove down mortgage rates.
But, Sklar said, as the economy recovers and people regain confidence in other types of investments, the Ten-Year Treasury will decline and mortgage rates will rise once again.
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How high will mortgage rates go in 2021?
Mortgage rates could continue to rise this year, particularly if the newly elected President Biden is able to enact a relief package that includes direct payments to taxpayers and other stimulus measures.
However, major housing agencies predict only a modest rise throuhout 2021, with 30-year mortgage rates staying in the high 2% or low 3% range on average.
|Agency||30-Yr Rate Prediction|
|National Assoc. of Home Builders||3.00%|
|National Assoc. of Realtors||3.20%|
|Mortgage Bankers Assoc.||3.30%|
|Average of all agencies||3.03%|
As long as the pandemic forces the closure or reduced hours of businesses and strains the economy, it’s unlikely that mortgage rates will rise substantially.
Even with widespread vaccine access, a recovery for individuals who suffered job losses or reduced hours, not to mention hard-hit small businesses, won’t happen overnight.
“I do think it’s going to get better, but I think it’s worse than people think,” said Jarred Kessler, CEO of EasyKnock, a company that allows people to tap the equity in their homes through a sale-leaseback program.
Kessler says a slow but steady recovery as the service industry resurges and businesses and individuals get back on their feet “will be correlated with [rising] interest rates.”
As long as COVID strains the economy, it’s unlikely mortgage rates will rise substantially.
“I think we’re going to stay in a low interest rate environment for definitely the next two years,” Kessler said.
Once the economy does begin to recover more consistently, however, increased yields on Treasury and other bonds will nudge interest rates higher as well, MarketWatch reports.
Rates could also rise if the federal government stops, or at least eases, its pandemic policy of buying unlimited mortgage-backed securities.
If the economy begins steadily improving, the Federal Reserve may begin tapering those purchases, which could impact rates. However, Kessler said a formal announcement about a policy change seems unlikely in the immediate future.
“It’s a Catch-22. If you do it, rates are going to go up and the Fed might be forced to backtrack a little bit,” Kessler said. “I think things are too fragile right now.”
The bottom line is that although rates may rise somewhat in the coming months, the Federal Reserve projects that they will stay at historically low numbers through at least 2023.
COVID vaccines will set the tone for mortgage interest rates
As a COVID-19 vaccine becomes more widely available, rates could also rise.
In theory, as more people get the vaccine and are able to safely eat at restaurants and attend large events, the economy will regain some of the momentum lost during the pandemic.
However, a full recovery will take time, particularly if many opt not to get the vaccine due to fear of side effects.
The Pew Research Center found that as of December, 60% of Americans surveyed said they would likely take the vaccine once it became available to them. But 21% expressed misgivings about the vaccine and said they would probably not get it, even once more information became available about it.
Although the percentage of people who need to be vaccinated in order to achieve herd immunity to COVID-19 is not yet known, according to the World Health Organization, it typically must be significantly higher than 60%.
While vaccine numbers and herd immunity might seem far removed from mortgage rates, they’re actually closely linked.
Remember that a weak economy means low mortgage rates, because investors pour money into the safe haven of mortgage-backed securities (MBS). This pushes rates down.
As the economy improves, which will gradually happen with widespread vaccination, investors will turn elsewhere and mortgage rates will once again increase.
Should I try to buy a house while rates are low?
Buying a home is something you should decide based on your finances rather than what’s happening in the market.
As Kessler puts it, “I think you’re nuts if you’re trying to time it” for when mortgage rates are at record lows.
“You’re in an unprecedented period of time where you can borrow for pretty much nothing right now. If you want to buy a home, don’t buy a home for a one-year trade. You should be thinking five, 10 years out,” he said.
It’s best to consider your credit score, savings, and the local real estate market, and make a decision based on those factors rather than the broader market.
Even if you wait to buy a home until your finances improve, you’re still looking at historically low mortgage rates.
Even if you wait to buy until you’re in a better financial position and rates increase by then, you’re still looking at historic lows, Sklar said.
The important thing is to make sure you can afford your payments on the home you want, and to take a long-term view of what you’re paying.
Sklar also noted that buyers should keep in mind that purchasing in a low-rate environment isn’t the only way to save on interest. You can also buy down your rate by paying discount points when you close on the home to reduce the amount of interest you’ll pay.
Establishing good credit, keeping non-mortgage debts low, and saving up for a larger down payment can also help you qualify for a competitive rate.
Should I rush to lock a refinance rate?
Sklar said he advises clients against trying to “time” the market or waiting to lock in a rate in the hopes that it might go a little bit lower.
“Do I expect it to go to zero? It’s not going to happen,” he said. “So if you don’t lock it, maybe you’ll lose a little bit from it going down. But there’s so much more to lose because if the rates go to simply 3%, you’ve just lost a tremendous amount of money.”
Don’t worry if you’re not at the rate-lock stage yet. The low-rate window for refinancing isn’t over.
Mortgage rates are still near record lows and expected to stay there for the rest of 2021. If your current interest rate is in the 4-5% range or higher, you stand to save a lot even as rates are ticking up slightly.
Instead of focusing on timing the market, focus on how a mortgage refinance could benefit you.
“I think people are getting too fixed on the interest rate,” Sklar said. “I think people have to look at their actual savings.”
Someone who wants to refinance, for instance, needs to calculate exactly how much they’ll save by applying for a new loan. If you’re only trimming your payments by a small amount each month, it may not be worth the time and closing costs to take out a new loan.
Or maybe saving month-to-month isn’t your priority. If you want to cash-out home equity or pay off your mortgage early, timing the market for a rock-bottom rate might not be quite as important.
Whether you’re refinancing or buying a home, the right timing always depends on your unique situation.
Rates should stay low for the rest of the year at least, so lock when you’re ready and it makes sense for you to do so.
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