The days of mortgage rates setting one all-time low after another may be numbered.
A year marked by economic woes has been kind to borrowers, with rates on home loans bottoming out 16 times during 2020, according to a long-running survey from mortgage giant Freddie Mac.
But as COVID vaccines and new stimulus checks and other fresh government relief spread throughout the country, the U.S. economy could recover more quickly — and that has the potential to push mortgage rates higher.
Just where will rates go in 2021? Here’s what the experts are predicting for the new year.
Slightly higher rates are forecast
The average rate on a 30-year fixed-rate mortgage — the most popular home loan in the U.S. — fell last week to a record 2.66%, according to Freddie Mac, which has been monitoring mortgage rates for nearly 50 years.
The firm’s most recent forecast, released in mid-October, looks for rates next year to average a slightly higher 3.0%.
Fannie Mae is a company similar to Freddie Mac — the two are government-sponsored enterprises that buy most U.S. home loans from lenders. Fannie Mae predicts 30-year rates will remain more steady, averaging between 2.7% and 2.8% next year.
Even so, Fannie Mae's economic and housing outlook notes: “With vaccination efforts and subsequent stronger economic growth, we expect Treasury yields to move higher over the next year." Those Treasury bond interest rates tend to set the pace for mortgages.
The Mortgage Bankers Association believes a jump in mortgage rates is possible in 2021. In its final look ahead of 2020, the MBA forecasts rates for 30-year fixed-rate loans rising to an average 3.2% by the end of 2021, buoyed by market rebounds and more massive spending by Washington.
What could hold rates down in 2021?
Let’s start with the Federal Reserve. America’s central bank slashed its benchmark interest rate — called the federal funds rate — to near zero back in March, and officials have indicated they expect to keep it way, way down at that level at least through the end of 2023.
The Fed wants to hold rates down until the country’s weak inflation rate tops 2%. Even though the federal funds rate doesn’t directly impact mortgage rates, a low interest rate environment should help depress the rates on home loans in the new year.
Another factor is economic conditions, which push mortgage rates low whenever investor confidence is shaken. Bad economic news can lead investors to pull money out of stocks and put it into Treasury bonds as a safe haven. That movement causes the Treasury yields to sink, and mortgage rates usually follow.
Until the coronavirus pandemic is under control — and a wide rollout of the vaccine is underway — economic markers like consumer confidence will be slow to rebound and may keep investors on edge.
Take advantage of rock-bottom rates while they last
Still, as forecasters see light at the end of the economic tunnel thanks to the vaccines and the expansion of government aid, months of falling mortgage rates might have finally hit the floor.
But if you’re a homeowner and want to cut your housing bills, you still have time to refinance to an ultra-low rate and reduce your interest costs.
With rates likely to rise at least a little bit next year, good refi candidates — those with a solid credit score and at least 20% home equity — may want to lock one of the best rates while they last.
Experts say both homeowners and homebuyers should compare at least five mortgage offers to find the best deal on a loan, because rates can vary from one lender to the next.
You can save even more cash by shopping around when you buy or renew your homeowners insurance. If you get a few quotes and review them side by side, you can find the lowest price for the coverage you need and potentially save hundreds of dollars.