Mortgage rates rise above 3%, making refinancing more urgent for homeowners
It was only a matter of time, but mortgage rates could finally develop as many housing experts expected by 2021: sharply upwards.
Interest rates on America’s most popular types of home loans rose last week, according to a widely followed survey.
Homeowners who pulled the trigger on a refinance before last week – when interest rates were well below 3% for months – can now celebrate their savings as well as their foresight. Those who postponed a refi because they expected interest rates to fall further should consider last week’s surge as a wake-up call.
Even at today’s high level, mortgage rates are still very attractive. But there’s little reason to believe that last week’s surge will be the last borrowers will see this year.
30 year fixed rate mortgage
The average 30-year fixed-rate mortgage rate rose from 2.88% to 3.01% last week, mortgage giant Freddie Mac reported Thursday.
It was the biggest weekly surge since mid-February, when optimism first built up about the country’s COVID-19 vaccination program.
Sam Khater, Freddie Mac’s chief economist, says the steep rise in interest rates over the past week was in part due to rising interest rates on government bonds, particularly the 10-year government bond. When the 10-year return improves, the fixed-rate mortgage rates tend to rise.
“Many factors have contributed to this surge,” adds Khater, “including the Federal Reserve’s announcement that it will be scaling back its support to capital markets, the expansion of inflation and emerging energy supply shortages, and other labor and material shortages strengthen.”
The Fed recently announced that it could soon end its tens of billion dollar monthly purchases of US Treasuries and mortgage-backed securities. These purchases were a COVID tonic for the economy – and have helped keep mortgage rates low.
15 year fixed rate mortgage
The average rate on 15-year fixed-rate mortgages also rose last week from 2.15% to 2.28%.
But even with the spike, 15-year loans are still a better deal than they were at that time last year when the average was 2.36%.
Rising 15-year interest rates are especially relevant for homeowners because the loans are a popular choice for refinancing. The shorter term means that you will pay significantly less interest during the term of the loan, but also a higher monthly payment.
It is important to keep in mind that Freddie shared interest rates are just averages and that some lenders offer below average 15 year interest rates – below 2% in some cases.
5 year adjustable mortgage rates
Not to be ignored, five-year variable rate mortgage rates (5/1 ARMs) rose to 2.48% last week from 2.43% a week earlier.
At the same time last year, the typical 5/1 ARM went for a stiffer 2.90%.
ARMs have two phases. In the first case, they come with fixed interest rates, which are usually lower than mortgages with a term of 15 or 30 years. After that, the interest rates adjust at set times – either up or down.
A 5/1 ARM therefore begins with a five-year fixed interest period. After that, your interest rate will be adjusted once a year.
Mortgage rates are not done climbing
After nearly four months in a row of 30-year mortgage rates below 3%, “it appears that rates in the 2% range are likely to be over,” writes Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors.
Many of the reasons are related to the Federal Reserve.
In addition to reducing its bond purchases in the coming months, the Fed could raise its key interest rate – the federal funds rate – as early as next year. The central bank kept rates near zero during the pandemic, and that had some impact on mortgage rates.
With the Fed also reporting that economic growth hit an impressive 6.7% in the second quarter, Washington, DC-based real estate manager Corey Burr says, “It’s something of a miracle that rates haven’t risen.”
Burr of TTR Sotheby’s International Realty estimates that if the Fed aggressively curbs bond purchases, the economy will grow more than 5% annually and inflation will stay high.
With the next year around the corner, the pile of money homeowners could save by refinancing their mortgages could soon get smaller and smaller.
How to nail a low refinancing rate now
Getting the lowest mortgage rate from a lender usually takes a bit of work, but the savings can be worth it. A recent study found that nearly half of homeowners who refinanced during the year that ended in April reduced their monthly mortgage payments by $ 300 or more.
The lowest rates usually go to borrowers with the strongest credit history. So start with your credit check, which you can easily do for free. You may find that your credit score is lower than you hope for and that you need to improve it before you risk being offered a not-so-good mortgage rate.
Lenders tend to shy away from borrowers who carry too much excruciating, high-interest debt. You might consider converting these balances into a low-interest debt consolidation loan to lower your interest costs and get rid of your debt faster.
Once you are ready to buy a mortgage, compare offers from at least five lenders. Studies by Freddie Mac and others have found that five is the magic number to maximize your refi savings.
If you are not interested in refinancing right now, there are other ways you can cut the cost of owning a home. When it comes to taking out or renewing home insurance, a small comparison purchase can save you hundreds of dollars a year.
This article is for information only and is not intended as advice. It is provided without any guarantee.