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Mortgage rates dropped again this week, after 7 straight weeks of increases early in the year.
After dropping to 3.13% last week, Thursday’s Freddie Mac survey has the 30-year fixed mortgage rate going even lower, to 3.04%.
The decrease comes after weeks of increasing rates, thanks to rising COVID-19 cases and new uncertainty over the Johnson & Johnson vaccine, according to a Wednesday statement by Zillow economist Matthew Speakman. Despite this renewed downward pressure on rates, Speakman says “the outlook for rates is likely still upward, barring any additional setbacks for the nation’s recovery from the pandemic.”
And with every rise in rates, refinancing a mortgage makes less financial sense for a certain group of homeowners, experts say.
With rates changing constantly, now is a good time to refocus on the fundamentals of getting a mortgage — whether to buy or refinance — and when it makes sense for you. Interest rates vary from week to week and even day to day, so it’s impossible to predict the perfect moment to lock in a low rate.
Knowing how mortgage rates are moving can help you plan, but getting a new mortgage or refinancing an existing one is more than just getting a great rate. You should act only when it makes sense for your situation. After all, what’s a great rate if it means rushing into a mortgage you can’t afford?
Here are some good guidelines you can use to determine when you should act, regardless of the latest daily rate changes.
When Does It Make Sense to Refinance?
The days of all-time low refinance rates are probably behind us, so is refinancing still a smart move?
A good rule of thumb is refinancing makes sense if you can lock in a new rate that’s at least 1% less than your current rate. So if your current mortgage rate is above 5%, refinancing might save you as long as you can lock-in a rate below 4%. For homeowners with rates in the low 4% range, the window to save with a refinance could close this year.
However, you’ll want to do the math to ensure you’re saving enough by refinancing to outweigh the upfront closing costs, which are typically 3% to 6% of the loan amount. Also, weigh the benefits of shortening your loan term, and the downsides of extending it. A shorter repayment period has higher monthly payments, but you’ll pay less interest over the long haul.
Let’s say you have 20 years and $250,000 left on your existing mortgage. If you’re refinancing into a mortgage with the exact same number of years as your current loan, here’s how much you could save with a 1% drop in your interest rate.
|Loan Term||Loan Amount||Mortgage Rate||Payment||Total Interest Paid|
However, this example doesn’t include closing costs, which could be $7,500 to $15,000. So you need to be sure you’ll be keeping this loan long enough to recoup your upfront costs. In this scenario, you’d be saving around $130 a month by reducing your interest rate by 1%. So it would take 58 to 116 months (roughly 5 to 10 years) to offset the fees you paid. If you plan on selling your home earlier, then your fees and refinance rate will need to be even lower for it to make sense.
When Does It Make Sense to Buy a Home?
Rising mortgage rates will have an impact on how much home you can afford. But compared to the other life circumstances that go into wanting to be a homeowner, your interest rate is less impactful than you may realize. Paying off debt and saving for a bigger down payment will add flexibility to your homebuying budget. And you can secure an affordable monthly payment without a record low rate.
In the short term, the money you can save on your rate and fees by shopping around is typically more than a normal daily rate increase. So it’s always important to look around for the best mortgage lender and your best rate and overall loan match. Your personal finances play a big part in your interest rate as well. So before you even start looking at houses it’s important to pay down your debt, build your credit score and hold off on applying for new lines of credit.
Why Are Rates Expected to Increase This Year?
In general, a lower unemployment rate and healthier economy will mean higher interest rates. So as the economy hopefully continues to improve throughout 2021, experts expect mortgage and refinance rates to increase up to as high as 3.4%.
While the economy hasn’t returned to its pre-pandemic levels, there are signs it’s on that track. Unemployment is continuing to decrease and vaccines are becoming more widely available. As the economy opens back up and more people are able to return to work, spending should increase. That, coupled with the latest $1.9 trillion stimulus package, will most likely keep inflation moving up and mortgage rates should move right along with it.
How Do Current Rates Compare to Historical Rates?
The most popular type of home loan is the 30-year fixed-rate mortgage, and since 1971 Freddie Mac has tracked the average rates for 30-year mortgages. Since topping out at over 18% in the ’80s, rates have steadily declined. They dropped into single digits in the ’90s, below 7% in the early 2000s, and haven’t topped 5% since 2011.
Even before the pandemic, rates were below 4% and today’s levels — just above 3% — are still lower than any time outside of 2020. Looking at the history of mortgage rates, you can still get a great rate compared to in previous decades.
Correction: An earlier version of this story incorrectly stated that mortgage rates had increased for 10 straight weeks before dropping the week of April 5. Rates had only increased 7 straight weeks before dropping, with three weeks remaining flat.