Mortgage rates are rising
At the beginning of the year, mortgage rates fell again. The average 30-year fixed rate fell to 2.65% – the lowest low ever, according to Freddie Mac.
But then the interest rates reversed.
The average 30-year mortgage rate rose to 2.79% on Jan. 14, according to a survey by Freddie Mac. Other sources reported averages of up to 2.88% on the same day.
Experts predict that interest rates will continue to rise in 2021.
The change should be modest – 30-year rates in the region of 3% at worst – but the prime of new record lows each week may be coming to an end.
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How much have mortgage rates increased?
No question about it, mortgage rates are rising. However, how much they increased depends on who you ask.
Freddie Mac, the industry focal point for current mortgage rates, reports a relatively modest increase of 0.14%. It also showed that rates continued to depress until last week.
But other sources paint a different picture.
For one thing, Mortgage News Daily reported 30-year rates of 2.86% on the same day Freddie hit its lowest low of 2.65%.
So which source is correct? Both are in a way.
Differences in tariff reporting are common due to different survey practices among companies. They can also vary depending on whether the source is looking at purchase or refinance mortgages.
Keep in mind that in Q3 2020, the Federal Housing Finance Agency (FHFA) introduced an adverse market refinancing fee of $ 500 per $ 100,000, which has resulted in higher interest rates on most refinancing loans.
The other thing to note is that the prices on the news are averages. This means that borrowers with good credentials will often still receive lower interest rates than advertised.
Although interest rates have risen, the lows of the past few weeks are still not completely gone.
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Why are mortgage rates rising?
The short answer is that mortgage rates are rising as the economy gradually looks more positive for the post-COVID recovery.
Coronavirus has been the main force in keeping rates down over the past year. The closer we get to widespread vaccination – and the better our economic prospects – the higher the rates will be.
Although the US is still at a critical stage with the virus and far from a concrete recovery, we are finally seeing a way forward.
This is mainly due to Biden's victory, as well as the Georgia runoff, which saw Democrats Raphael Warnock and Jon Ossoff win Senate seats.
The effects of Biden and Senate Democrats win
The current movements in mortgage rates are partly due to the fluid political and economic situation in the US as the country prepares for a transition from the Trump administration to the White House in Biden on Jan. 20.
President-elect Joe Biden has signaled that he wants to implement a $ 1.9 trillion stimulus plan to boost the economy, and the Democratic victories in Georgia give him a Senate majority likely to back his efforts.
Although Biden's proposed stimulus plan has generated criticism that aid reviews as high as $ 2,000 are unlikely to mean much to the economy, the plan's goal is to ease the country's economic burden and stimulate spending and growth.
Economic growth would likely increase mortgage rates as various sectors recover.
Mortgage Professional America Magazine also reported that stimulus spending could raise inflation, which would also raise mortgage rates.
Keep an eye on the 10-year treasury
Eli Sklar, Senior Loan Consultant at LoanDepot, pointed to the ten-year Treasury as an indicator of an improving economy and as a signal for an increase in interest rates in the coming year.
“The price of the ten-year Treasury, which is an important indicator of mortgage interest rates, is inversely dependent on market developments. As the market continues to perform well, the 10-year Treasury will drop in value as the 10-year Treasury is known to be the safest investment, ”Sklar said.
An increase in investor interest in the ten-year treasury in the wake of crater formation last year, coupled with the Federal Reserve's commitment to keep interest rates low, resulted in a decline in mortgage rates.
But, Sklar said, when the economy recovers and people regain confidence in other types of investments, the ten-year treasury will fall and mortgage rates will rise again.
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What will mortgage rates be in 2021?
Mortgage rates could continue to rise this year, especially if newly elected President Biden can pass an aid package that includes direct payments to taxpayers and other stimulus measures.
However, the major housing agencies only forecast a modest increase through 2021, with 30-year mortgage rates remaining in the high range of 2% or low 3% on average.
30-year rate forecast
National Assoc. from builders
National Assoc. from brokers
Mortgage Banker Assoc.
Average of all agencies
As long as the pandemic forces business hours to shut down or shorten and weighs on the economy, mortgage rates are unlikely to rise significantly.
Even with widespread access to vaccines, recovery for those who have suffered job losses or reductions in hours, not to mention badly affected small businesses, will not happen overnight.
"I think it's getting better, but I think it's worse than people think," said Jarred Kessler, CEO of EasyKnock, a company that enables people to get their homes equity through a sale-leaseback program open up.
Kessler says a slow but steady recovery as the services industry bounces back and businesses and individuals bounce back "will correlate with (rising) interest rates."
As long as COVID weighs on the economy, mortgage rates are unlikely to rise significantly.
"I think we will definitely stay in a low interest rate environment for the next two years," said Kessler.
However, once the economy recovers more consistently, higher yields on government and other bonds will also raise interest rates, MarketWatch reports.
Interest 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 continues to improve, the Federal Reserve could begin reducing these purchases, which could affect interest rates. However, Kessler said a formal announcement of a policy change was unlikely in the near future.
"It's a catch-22. If you do this, interest rates will go up and the Fed may be forced to back off a bit," said Kessler. "I think things are too fragile right now."
The bottom line is that while policy rates could rise a little in the coming months, the Federal Reserve expects them to stay at historically low levels through at least 2023.
COVID vaccines set the tone for mortgage rates
As a COVID-19 vaccine becomes more prevalent, rates could also rise.
In theory, the economy will regain some of the momentum lost during the pandemic if more people receive the vaccine and can safely eat in restaurants and attend major events.
However, a full recovery will take time, especially if many choose to avoid the vaccine for fear of side effects.
The Pew Research Center found that by December, 60% of Americans surveyed said they were likely to take the vaccine as soon as it became available to them. But 21% raised concerns about the vaccine, saying they probably wouldn't get it even if more information about it became available.
Although the percentage of people who need to be vaccinated to achieve herd immunity to COVID-19 is not yet known, according to the World Health Organization, it usually has to be well above 60%.
While vaccine numbers and herd immunity may seem a long way from mortgage rates, they are actually closely related.
Remember that a weak economy means low mortgage rates as investors are putting money in the safe haven of mortgage-backed securities (MBS). This pushes interest rates down.
If the economy improves, which will gradually happen with widespread vaccination, investors will turn elsewhere and mortgage rates will rise again.
Should I try to buy a home while the prices are low?
Buying a home should be based on your finances rather than market conditions.
As Kessler puts it, "I think you're crazy trying to tell the time" when mortgage rates are at record lows.
"You are in an unprecedented time where you can currently borrow for next to nothing. If you want to buy a house, don't buy a house for a year-long trade. You should think about five, ten years," he said.
It is best to consider your creditworthiness, savings, and the local real estate market and make a decision based on these factors rather than the broader market.
Even if you wait to buy a home for your finances to improve, you will still see historically low mortgage rates.
Even if you wait to buy until you're in better financial condition and interest rates rise by then, you'll still see all-time lows, Sklar said.
The important thing is that you can afford your payments for the house you want and that you see what you pay for in the long term.
Sklar also noted that buyers should keep in mind that buying in a low interest rate environment isn't the only way to save interest. You can also lower your tariff by paying discount points when you close the house to reduce the amount of interest you will be paying.
If you get good credit, keep your no-mortgage debt low, and save for a larger down payment, you may also qualify for a competitive interest rate.
Should I hurry to lock a refinancing rate?
Sklar said he is advising clients not to "premature" the market or wait to set a course in the hopes that it could turn out a little lower.
“Do I expect it to go to zero? That won't happen, ”he said. "So if you don't lock it you might lose a little bit when it goes down. But there is so much more to lose because if rates just go up to 3% you have just lost a tremendous amount of money."
Don't worry if you are not yet in the tariff lock phase. The low-interest window for refinancing is not yet over.
Mortgage rates are still near record lows and are expected to stay there for the remainder of 2021. If your current interest rate is in the 4 to 5% or higher range, you can save a lot even if interest rates go up slightly.
Instead of focusing on the timing of the market, focus on how mortgage refinancing can benefit you.
"I think people are getting fixed on the rate," Sklar said. "I think people need to watch out for their actual savings."
For example, if you want to refinance yourself, you have to calculate exactly how much you will save by applying for a new loan. If you cut your payments by just a small amount each month, it may not be worth the time and closing costs to get a new loan.
Or maybe saving monthly isn't your priority. If you're looking to get your home equity paid off or get your mortgage paid off early, it may not be all that important to keep the market low.
Whether you are refinancing or buying a home, the right timing always depends on your individual situation.
Prices should stay low for at least the rest of the year. So lock when you are ready and it makes sense to do so.
Check your new plan (January 18, 2021)