It was only a matter of time, but mortgage rates could finally follow the path that many housing experts expected them to travel at this point in 2021: sharply higher.
The rates for the most popular types of home loans in the United States jumped last week, according to a widely followed survey.
Homeowners who pulled the trigger on a refinance before last week – when rates were well below 3% for months – can now celebrate both their savings and their foresight. Those who delayed a refi because they expected another rate cut should take last week’s hike as a wake-up call.
Even at today’s high levels, mortgage rates remain very attractive. But there’s little reason to believe that last week’s increase will be the last borrowers will see this year.
30-year fixed mortgage rates
The average interest rate on 30-year fixed-rate mortgages fell from 2.88% to 3.01% last week, mortgage giant Freddie Mac reported Thursday.
This is the largest weekly increase since mid-February, when optimism first surfaced over the country’s COVID-19 vaccination program.
Sam Khater, chief economist for Freddie Mac, said last week’s sharp rate hike was in part due to the surge in interest on Treasury bonds, particularly 10-year Treasury bills. When the 10-year yield improves, fixed mortgage rates tend to rise.
“Many factors have led to this increase,” Khater adds, “including the Federal Reserve communicating that it will reduce its support for capital markets, widening inflation and emerging energy supply shortages that are exacerbating d ‘other labor and material shortages “.
The Fed recently said it could soon cut back on its monthly purchases of tens of billions of dollars in Treasury bonds and mortgage-backed securities. These purchases were a COVID tonic for the economy – and helped keep mortgage rates low.
15-year fixed mortgage rates
The average rate on 15-year fixed-rate mortgages also increased last week, from 2.15% to 2.28%.
But even with the increase, 15-year loans are still a better deal than they were at this time last year, when the average was 2.36%.
The 15-year rate hike is particularly relevant for homeowners, as loans are a popular choice for refinancing. The shorter term means you’ll pay much less interest over the life of the loan, but it also means a higher monthly payment.
It is important to keep in mind that the rates shared by Freddie are only averages and that some lenders offer rates below the 15 year average, below 2% in some cases.
5-year adjustable mortgage rates
Not to be outdone, five-year adjustable rate mortgages (5/1 ARM) also saw their rates rise last week, to 2.48% from 2.43% a week earlier.
At the same time last year, the typical 5/1 ARM was aiming for a 2.90% stiffer.
MRAs have two phases. During the first, they come with fixed interest rates that are generally lower than those attached to 15 or 30 year mortgages. After that, interest rates adjust – up or down – at predetermined times.
So a 5/1 ARM starts with a five-year fixed rate period. Your interest rate will then adjust once a year.
Mortgage rates keep on rising
After nearly four consecutive months of 30-year mortgage rates below 3%, “it looks like the rates in the 2% range are probably over,” writes Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors.
Most of the reasons are related to the Federal Reserve.
In addition to reducing its bond purchases in the coming months, the Fed may increase its benchmark interest rate – the federal funds rate – as early as next year. The central bank kept the rate close to zero during the pandemic, which had some influence on mortgage rates.
The Fed also reporting that second-quarter economic growth hit an impressive 6.7%, said Corey Burr, Washington-based director of real estate, “It’s sort of a miracle that rates don’t. have not increased further “.
Burr, of TTR Sotheby’s International Realty, believes that if the Fed is aggressive in reducing its bond purchases, the economy is growing by more than 5% a year and inflation remains high, mortgage rates “should certainly do facing upward pressure in 2022 “.
As next year approaches, the pile of money homeowners could save by refinancing their mortgages may soon start to decline more and more.
How to Fix a Low Refinance Rate Now
Getting the lowest mortgage rate from a lender usually takes a little work, but the savings can be worth it. A recent study found that nearly half of homeowners who refinanced in the year ending in April cut their monthly mortgage payments by $ 300 or more.
The lowest rates usually go to borrowers with the strongest credit history. So, start by reviewing your credit score, which you can easily do for free. You may find that your credit score is lower than you hope and will need to improve before you risk being offered a not-so-high mortgage rate.
Lenders tend to avoid borrowers who have too much stubborn, high-interest debt. You might consider turning those credit balances into a low interest debt consolidation loan to lower your interest charges and get rid of your debt faster.
Once you’re ready to buy a mortgage, be sure to compare offers from at least five lenders. Studies by Freddie Mac and others have shown that five is the magic number for maximizing your refi savings.
If refinancing isn’t something you’re currently interested in, there are other ways you can lower the cost of home ownership. When it comes to buying or renewing home insurance, a little comparison can save you 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.