Mortgage Rates Take a Dip to 3.2% With Emerging COVID Variants Spooking the Economy

After two weeks of increases, mortgage rates appeared to be on a consistent path upward this December. But everything changed when news broke of the new Omicron variant of COVID-19. 

Experts previously forecasted rates to rise. Instead, the average 30-year fixed mortgage rate took an unexpected step backward by 0.04% to 3.2% last week. 

The Omicron variant has been adding downward pressure on interest rates. Experts are now predicting rate volatility as COVID and rising inflation push and pull on mortgage rates. 

Mortgage rates are likely to experience continued volatility but stay low, Nicole Bachaud, a Zillow economist, told us recently. “One of the main reasons for [the recent rate fluctuations] is the increase in COVID cases that we’ve seen,” she says. At the same time, inflation has been higher, which typically puts upward pressure on mortgage rates. These counterbalancing factors contribute to the swings we’ll see in mortgage rates this month and beyond.

Despite expected rate volatility, mortgage rates are still near all-time historic lows, especially when compared to pre-pandemic levels. Since rates can change daily, it could be in your best interest to take advantage of a low rate now if it’s beneficial for you. 

Here is a breakdown of the latest rate movement, what we might see going forward, and how borrowers can prepare.    

Mortgage Rates: Looking Back 

The average 30-year fixed mortgage rate was around 3% one year ago. That’s 0.20 percentage points lower than last week’s average. Looking at rates two years ago, they were at 3.9% — significantly higher than they are today.  

The significant drop in rates in the last year and a half can be attributed to actions taken by the Federal Reserve in response to the COVID-19 pandemic. According to the U.S. Bureau of Labor Statistics, nearly 9 million reported losing their jobs in 2020. At this time, homeowners became at-risk of defaulting on their mortgage payments. In an effort to avoid widespread foreclosures, the Federal Reserve implemented policies intended to drive down interest rates to make housing more affordable. Lower interest rates can help keep homebuying affordable and encourage homeowners to refinance to lower monthly mortgage payments. 

Mortgage Rates: Current Outlook 

Previously, mortgage rates saw two weeks in a row of increases, which is what experts predicted for the end of 2021. Expected rate trajectory changed when news of the Omicron variant broke. In response, the average 30-year fixed mortgage rate dropped by 0.04% to 3.2%.

Last week’s rate decrease isn’t as low as the sub-3% we saw earlier this year, but still considered favorable from a historical perspective.  

Homebuyers can benefit from declining interest rates to help offset rising home prices. There are signs the housing market is starting to cool down, but high home values can overshadow the potential savings from a low mortgage rate. High home prices force homebuyers to save for larger down payments to keep home budgets in an affordable range. A low mortgage rate can help offset down payment expenses. 

Existing homeowners are seeing home equity growth which can make it easier to qualify for a refinance loan and get better pricing. You also have the option to do a cash-out refinance to pay off high-interest debt, conduct home improvements, or fund college expenses. Cash-out refinances have grown in popularity this year. During the first quarter of 2021, cash-out refinances made a big shift from 37% to 49% of total refinances, according to mortgage data analytics firm Black Knight.  

Mortgage Rates: Looking Forward

Looking forward, housing experts predict rates to gradually increase over the long term into 2022 but are divided on rate predictions over the short term. However, experts agree to anticipate rate volatility as competing economic factors push and pull on mortgage rates.

The introduction of the new Omicron COVID-19 variant puts downward pressure on rates, but could be short-lived depending on Omicron’s severity. Raphael Bostic, the Federal Reserve Bank of Atlanta president, recently stated: “Each successive wave of COVID-19 has led to milder economic slowdowns. If that holds, the economy will continue to grow through it.” 

On the flip side, we recently saw the highest inflation in 31 years. Rising inflation and strained supply chains are cited by experts as putting upward pressure on mortgage rates. 

What This Means for Borrowers

Homeowners

Now may be a good time for a refinance. Homeowners who are on the fence about refinancing may want to consider it. Rates are likely to continue its upward trajectory in the long term, so it may be worth crunching the numbers with a few lenders to see if you can benefit. 

Homebuyers

Some experts advise delaying a home purchase until the market cools further. Others say not to time the market and buy when the time’s right for your personal situation. Elizabeth Rose, certified mortgage planning specialist with Mortgage300, told us recently she is against waiting for a rate dip to lock in. “If you’re looking to time the market…you’re probably setting yourself up for disappointment,” she said. Rates are still favorable even with the moderate increase we’ve been seeing, says Rose. 

If you don’t want to wait to buy a home, housing experts recommend planning ahead:

1. Know how much house you can afford
2. Sticking to a home buying budget
3. Save for a large enough down payment
4. Avoid rushing into buying