Mortgage rates spike above 3% and make refinancing more urgent for homeowners
It was only a matter of time, but mortgage rates may finally be heading the way many housing experts have expected them to travel by this point in 2021: sharply upward.
Rates on America’s most popular types of home loans surged last week, according to a widely followed survey.
Homeowners who pulled the trigger on a refinance prior to last week — when rates sat well below 3% for months — can now celebrate both their savings and their foresight. Those who have been delaying a refi because they expected rates to fall further should consider last week’s rise a wake-up call.
Even at today’s elevated levels, mortgage rates are still very attractive. But there’s little reason to think last week’s increase will be the final one borrowers see this year.
30-year fixed mortgage rates
The average interest rate on 30-year fixed-rate mortgages jumped last week from 2.88% to 3.01%, mortgage giant Freddie Mac reported on Thursday.
It was the largest weekly increase since mid-February, when optimism was first building over the country’s COVID-19 vaccination program.
Sam Khater, Freddie Mac’s chief economist, says last week’s steep rise in rates was partly due to soaring interest on Treasury bonds, specifically the 10-year Treasury note. When the yield on the 10-year improves, fixed mortgage rates tend to rise.
"Many factors led to this increase," Khater adds, "including the Federal Reserve communicating that it will taper its support of the capital markets, the broadening of inflation and emerging energy supply shortages which compound other labor and materials shortages."
The Fed recently said it may soon taper its monthly buying of tens of billions of dollars in Treasury bonds and mortgage-backed securities. Those purchases have been a COVID tonic for the economy — and have helped keep mortgage rates low.
15-year fixed mortgage rates
The average rate on 15-year fixed mortgages also shot higher last week, from 2.15% to 2.28%.
But even with the increase, 15-year loans are still a better bargain than they were at this time last year, when the average was 2.36%.
Rising 15-year rates are especially relevant for homeowners, because the loans are a popular choice for refinancing. The shorter term means you’ll pay far less in interest over the life of the loan, but it also means a higher monthly payment.
It’s important to keep in mind that the rates shared by Freddie are just averages, and that some lenders are offering below-average 15-year rates — under 2%, in some cases.
5-year adjustable mortgage rates
Not to be left out, five-year adjustable rate mortgages (5/1 ARMs), also saw their rates go up last week, to 2.48% from 2.43% a week earlier.
At the same point last year, the typical 5/1 ARM was going for a stiffer 2.90%.
ARMs have two phases. During the first, they come with fixed interest rates that are typically lower than those attached to 15- or 30-year mortgages. After that, the interest rates adjust — either up or down — at predetermined times.
So, a 5/1 ARM begins with a five-year fixed-rate period. Your interest rate will adjust once a year after that.
Mortgage rates aren't done climbing
After nearly four straight months of 30-year mortgage rates under 3%, "it seems that rates at the 2% range are likely over, writes Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors.
Many of the reasons are tied to the Federal Reserve.
Besides trimming its bond buying in the coming months, the Fed may raise its benchmark interest rate — the federal funds rate — as early as next year. The central bank has held the rate close to zero during the pandemic, and that's had some influence on mortgage rates.
With the Fed also reporting that economic growth in the second quarter hit an impressive 6.7%, Washington, D.C.-based real estate executive Corey Burr says, "it’s somewhat of a miracle rates haven’t jumped up more."
Burr, of TTR Sotheby's International Realty, estimates that if the Fed is aggressive in tapering its bond purchases, the economy grows more than 5% annually and inflation remains high, mortgage rates "should certainly face upward pressure in 2022."
With next year right around the corner, the pile of money homeowners could save by refinancing their mortgages may soon start getting smaller and smaller.
How to nail down a low refinance rate now
Getting the lowest mortgage rate from a lender generally takes a little work, but the savings can be worth it. A recent study found almost half the homeowners who refinanced during the year that ended in April slashed their monthly mortgage payments by $300 or more.
The lowest rates generally go to borrowers with the strongest credit histories. So, start by reviewing your credit score, which you can easily do for free. You may find your credit score is lower than you'd hope, and that you’ll need to improve it before you risk being offered a not-so-great mortgage rate.
Lenders tend to shy away from borrowers who are carrying too much nagging, high-interest debt. You might consider rolling those credit balances into a lower-interest debt consolidation loan, to reduce your interest costs and eliminate your debt faster.
Once you’re ready to shop for a mortgage, be sure to compare offers from at least five lenders. Studies from Freddie Mac and others have found that five is the magic number for maximizing your refi savings.
If a refinance isn’t something you’re currently interested in, you have other ways to lower the cost of homeownership. When it comes time to buy or renew homeowners insurance, a little comparison shopping could help you save hundreds of dollars a year.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
