Mortgage rates were historically low for most of 2020, but as the pandemic recovery accelerates, that is changing. Rates mostly increased in 2021, and this trend is expected to continue throughout the year as more people get vaccinated and return to work.
But that doesn’t mean mortgages are about to become unaffordable, either. Many people will still be able to secure favorable loan rates compared to pre-pandemic times, and millions of homeowners could still potentially save money by refinancing their loans before rates rise even more.
Why rates have come down so low
The economy is complicated, so there isn’t a completely clear explanation as to why mortgage rates were so low last year, but the easiest way to understand it is because Treasury rate went down.
“Mortgage rates typically follow 10 years,” said Joel Kan, associate vice president of economic and industrial forecasting at the Mortgage Bankers Association (MBA). “This blow to Treasury rates came at a time when we were already starting to see rates drop in early 2020 and there was already the start of a wave of refi.”
For much of 2020, economic uncertainty kept Treasury rates lower, which also encouraged low mortgage rates. The 10-year Treasury generally follows fixed mortgage rates.
Where rates could be heading in the coming months
The days of mortgage rates below 3% are probably over for now. Control of the pandemic is for the foreseeable future for the United States, which means the economy will start to return to some sort of normal in the coming months.
“Our forecast right now is to see rates continue to rise,” Kan said. “Between now and the end of the year, looking for a further 50 basis point increase, as economic growth is expected to continue at current pace or accelerate.”
MBA predicts that the average rate on a 30-year fixed-rate loan will be 3.6% by the end of 2021. But the rise should not be as sudden as the publication date was last year.
“It’s been a gradual increase because in the second half of last year there was still a lot of uncertainty about the vaccine and how quickly things would reopen,” Kan said. “Overall, things are back pretty well. Of course, there are households that are still suffering, but overall things turned out much faster than expected. “
What drives rates up
As businesses reopen and consumers start spending more in the hospitality industry again, mortgage rates are likely to continue to rise gradually throughout the year.
Rising consumer demand can compress supply chains and lead to more inflation. The result is almost certain to be higher mortgage rates to come.
“On top of that, because of this greater growth potential, we’ve seen inflation rise, the prices that consumers pay for goods and services,” Kan said. “We have already seen many reports from builders that with the high demand for housing, not only do we have a low supply of housing, but construction costs are increasing,” he added. “All of this will work together to push rates higher, faster. “
For homebuyers, rising rates shouldn’t have as big an impact as rising prices. One in progress housing shortage has created a strong seller’s market, and although mortgage rates are gradually rising, the greatest pressure on housing affordability appears to come in the form of competition from other buyers.
“Obviously, home price growth has been extremely high and seems to be accelerating, but we don’t see rates as a big factor in that yet,” Kan said. “If rates go up faster, it’s possible” it could have more effect.
How many people could still benefit from refinancing
Several million owners.
But it is not that simple. Data firm Black Knight reported this month that 11 million owners save money through refinancing, but that doesn’t necessarily mean the savings are worth it for all of those borrowers.
“If I have 10 years left and I refinance at a lower rate but it adds another 5, 10, 20 years to my mortgage, is it worth it to me?” Kan said. “Yes, we could look at how many borrowers could refinance,” but there are other factors to consider.
Aside from borrowers who are about to pay off their current loan, it also doesn’t make sense to refinance if you could move out and make a profit from the house. Because the competition among buyers is so high, for some it may be a good idea to use this opportunity to upgrade or downsize instead.
At the end of the line
The days of the lowest mortgage rates seem over, but that doesn’t mean they’re not yet low by historical standards. Rates are expected to continue to rise this year, but are expected to remain affordable for many borrowers for the foreseeable future. However, if you have a fairly new loan, you may want to explore your refinancing options before rates rise above a level that could save you significant amounts of money.