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Low mortgage rates are holding on — and millions of US homeowners are making this big mistake

·5 min read
Low mortgage rates are holding on — and millions of US homeowners are making this big mistake
Low mortgage rates are holding on — and millions of US homeowners are making this big mistake

Mortgage rates have been relatively stable over the past few weeks, a widely followed survey shows, even as experts keep warning that higher borrowing costs are on the way.

For now, fears about the omicron variant and its potential impact on the economy are keeping rates from spiking. Meanwhile, other factors continue to threaten today’s historically low rates.

Millions of homeowners still have an opportunity to chop their housing costs by refinancing, but many of them are making a major miscalculation.

30-year fixed mortgage rates

close up young man hand touching house's model for check and summary expense of home loan mortgage for refinance plan , people lifestyle concept
chainarong06 / Shutterstock

The interest rate on a 30-year fixed rate mortgage averaged 3.11% last week, up a hair from 3.10% the previous week, mortgage giant Freddie Mac is reporting.

One year ago, the survey had 30-year fixed-rate mortgages averaging 2.71%.

Rates have remained steady in recent weeks despite volatility in the financial markets, says Sam Khater, Freddie Mac’s chief economist.

"The consistency of rates in the face of changes in the economy is primarily due to the evolution of the pandemic, which lingers and continues to pose uncertainty,” Khater says. “This low mortgage rate environment offers favorable conditions for refinancing."

Next year is likely to bring changes. A new Realtor.com forecast shows rates hitting 3.60% by the end of 2022, creating further affordability challenges for buyers shocked by high house prices.

"Buyers looking at today’s median-priced home are already paying $165 more on their monthly mortgage than they did a year ago,” says George Ratiu, Realtor.com's manager of economic research.

15-year fixed mortgage rates

The average interest rate on a 15-year fixed rate mortgage fell to 2.39% last week, moving closer to where it was a year ago, when the average was 2.26%, Freddie Mac says.

One week ago, the average 15-year rate was 2.42%. If you’ve been considering refinancing your home loan into a mortgage with a shorter term, this could be the time to make your move.

Many homeowners with 30-year mortgages like to refi into 15-year loans. Your monthly payment may increase, but you can cut your interest costs significantly over the lifetime of your loan.

5-year adjustable mortgage rates

Rates on five-year adjustable-rate mortgages averaged 2.49% last week, up from 2.47% the previous week. A year ago at this time, the loans were averaging a much steeper 2.86%.

These so-called ARMs have rates that can change after a period of time determined at the start of the loan. If you take out 5/1 ARM, for example, you'll enjoy five years of fixed interest. Then your rate can adjust — up or down — every (one) year after that.

If you already have an adjustable-rate mortgage, refinancing right now might make good sense, just in case rates do move higher next year.

How many US homeowners are blowing it

An aerial top down view of luxury bungalow house
Syafiq Adnan / Shutterstock

Homeowners pounced on cheap borrowing costs during the first half of 2021, when the 30-year fixed-rate mortgage averaged 2.90%. During the same time period, refinance activity spiked 33%, Freddie Mac says.

Borrowers who refinanced 30-year fixed-rate mortgages into new ones during the first six months of this year have saved over $2,800 in mortgage payments annually, according to Freddie Mac's research.

Now, with the end of the year in sight, mortgage remain considerably lower than they were before the pandemic. Two years ago, in December 2019, Freddie Mac put the average for a 30-year fixed-rate mortgage around 3.75%.

But despite the potential savings, refinancing has stalled. Refi applications cratered 15% in the most recent week, the Mortgage Bankers Association says, as homeowners seemed to be wagering that rates would go lower.

That's probably not a smart bet. Mortgage experts have been saying higher rates are on the horizon, amid rising inflation and the Federal Reserve’s plans to cut back on its pandemic-era policies that have kept borrowing costs low. If inflation keeps soaring, analysts say the Fed will raise interest rates more quickly than expected.

How to find the best refinance rate

Payday. Concentrated attentive millennial spouses sitting on couch at home discussing possibility of taking out a refinance mortgage loan.
fizkes / Shutterstock

The holiday season isn’t typically the busiest time for buying homes and refinancing mortgages. But if you’ve canceled your trip to visit friends or family amid fears of omicron, you may have some extra time on your hands to explore whether you might benefit from a refi.

The lowest rates are typically reserved for borrowers with the best credit. It’s easy today to check your credit score for free — and you may want to celebrate if you find your score is in the 700s, or even the enviable 800s.

If you're not quite ready to pop the champagne — maybe you accumulated some high-interest debts during the first year of the pandemic — you may want to roll your balances into a lower-interest debt consolidation loan. You'll streamline your bills, reduce the interest you pay, and possibly wipe out your debt faster.

When you decide to proceed with a mortgage refinance, compare loan offers from multiple lenders to find the lowest rate for your area and for a person with your credit profile. Studies from Freddie Mac and others have found comparing five rate quotes seems to be the magic number for getting the best deal on a mortgage.

And don’t ignore other other ways to cut the cost of homeownership. Review prices from several home insurers to see if you might reduce your homeowners insurance bills.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.