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It’s been a wild year for the mortgage industry, with rates hitting record lows numerous times.
But if you haven’t already refinanced your mortgage or bought a home, past interest rates aren’t as important as what they’re going to be in the future. While no one has a crystal ball when it comes to predicting mortgage rate trends, the general consensus of the experts we talked to is that it’s likely rates will inch upward in 2021.
Mortgage Rates Predictions for 2021
Over the next 90 days, you should expect to see continued growth for mortgage and refinance rates. “Our long-term view for mortgage rates in 2021 is higher, and they seem to be on course to move in that direction over the next 90 days,” says Realtor.com chief economist Danielle Hale. “As the economic outlook strengthens, thanks to progress against coronavirus and vaccines plus a dose of stimulus from the government, this pushes up expectations for economic growth and inflation, driving long-term bond rates higher.”
And long-term Treasury bond rates are a key indicator for mortgage rates. The 10-year Treasury yield bottomed out in August 2020, and climbed back up to 1.18% in February 2021. “Mortgage rates have been coming back down while bond yields have been rising since they were never properly priced during this crisis. However, we are getting close to a traditional relationship with bonds and mortgage rates,” says HousingWire housing data analyst Logan Mohtashami. So going forward, that means rising long-term bond yields should drive mortgage rates higher.
A big part of our economic recovery is getting people back to work, which is going to be heavily reliant on the Coronavirus vaccine. “Mortgage rates should rise as we are in the early stages of getting our economy working again. We are early in the vaccination process, and over the next 90 days, that data should get better,” Motashami says.
But mortgage rates could stay low if there is unexpected bad news surrounding COVID-19 or the vaccine distribution. And what happens with the stock market could also impact rates. “We haven’t had a 10% plus correction [in the stock market] since March of 2020,” Mohtashami says. “[A drop in the stock market] will provide a rally in bonds, but should only be short term.”
Where Are Mortgage Rates Headed in 2021?
Exactly when we may see rates start to rise, and how much they will increase, depends on a few factors. How we’re able to deal with the pandemic and its impact on the economy is the main thing to pay attention to. But other factors, like inflation and the Federal Reserve’s desire to keep rates low, will also affect mortgage rates.
What may seem like a small increase in rates can have a big impact on your bottom line. For a $300,000 30-year home loan, an increase of 1%, from 2.7% to 3.7%, would increase your monthly payment by $164. Over the life of the same loan, that extra 1% would cost you an additional $59,159 in interest, according to the NextAdvisor mortgage calculator.
If you’re in the market for a new house or are looking to refinance your current mortgage, just keep in mind: The interest rate isn’t the only thing to pay attention to when shopping for a mortgage lender. You should carefully read each loan estimate to see exactly what fees you’re paying, because the lowest interest rate isn’t always the best deal.
As of Feb. 11, 2020, the average 30-year fixed mortgage rate is 2.73%, according to Freddie Mac. Looking ahead, here’s what the experts are predicting will happen to mortgage rates in 2021.
Logan Mohtashami, Housing Data Analyst at HousingWire
Based on how low interest rates were in 2020, Mohtashami believes we’ll see the average mortgage interest rate inch upward in 2021. But it is difficult to see it going above 4% since we’re still in the thick of the COVID-19 pandemic, he says. “The COVID-19 crisis was a deflationary event that sent bond yields and mortgage rates lower than they traditionally would have gone in a normal recession.”
Any increase we may see in mortgage rates hinges on the health of the U.S. economy, and Mohtashami maintains that is dependent on how we handle the pandemic. “If we don’t execute on getting a vaccine, then mortgage rates could stay around these low levels,” he says. “Once we get a vaccine distributed and better treatments, that last 10 million Americans who are still unemployed should be able to find work. That income, plus the fiscal aid and monetary aid should drive up inflation just a little bit higher, and demand should be higher and growth should be back to normal … Slow and steady growth of the U.S. economy will be the primary driver of higher mortgage rates next year.”
Lawrence Yun, Chief Economist with the National Association of Realtors
Yun believes that mortgage rates will remain stable in 2021 — with the potential for a slight increase from the all-time low of 2.71% we saw in 2020 for 30-year, fixed rate mortgages. “In 2021, I think rates will be similar or modestly higher, maybe 3%” he says. “So mortgage rates will continue to be historically favorable.”
Yun thinks the Federal Reserve’s actions are critical to the direction mortgages rates will go. “The Federal Reserve has indicated they want to pursue this low interest rate policy for a long period, over the next two or three years, “ he says. While the Federal Reserve doesn’t directly control mortgage rates, Yun agrees with the conventional wisdom that its actions will indirectly impact rates — and can help keep them low in 2021.
If you’re considering a mortgage refinance you may not want to wait long, as many of the experts we talked to expect rates to rise in the second half of 2021.
Danielle Hale, Chief Economist at Realtor.com
Hale sees low rates continuing through the first half of 2021. “Making any kind of prediction for next year is difficult. But our expectation is that mortgage rates start the year roughly in line with where they are now, and they stay fairly low — right around 3% — for the first half of the year,” Hale says. She believes that in the second half of 2021, if access to a vaccine helps to improve the economy, rates could rise. “Mortgage rates could approach 3.4% by the end of the year,” she says.
While Hale expects rates to stay low compared to historical averages, we could see a relatively drastic shift in rates. “We’re at such low levels that 3.4% will be a significant increase — that’s 70 basis points above where we are now,” Hale says. “Homebuyers will notice it when they’re calculating their monthly mortgage payment.” This increase in mortgage rates could slow down the demand for housing in the later part of next year.
Greg McBride, Chief Financial Analyst for Bankrate.com
McBride sees rates fluctuating by 0.5% to 0.75% early on in 2021, with the potential for a fairly swift rise as the year progresses. “Next year’s likely to see a fair amount of volatility, and we’ll see a lot of the record low rates that we’ve seen this year,” McBride says. “But there’s a possibility that rates will move higher, particularly in the back half of the year once vaccines become widely available and we’ve begun to see a return to normalcy from an economic perspective.”
Looking at what will impact rates the most in 2021, McBride thinks the overall economic health of the country and the Federal Reserve’s actions are what you should pay attention to. “If the Federal Reserve increases their purchases of long-term bonds that will be a downward influence on rates,” he says. “That’s something that could either keep [mortgage rates] from rising or push them lower.” And if the economy makes a strong recovery, rates could start moving higher.
Len Kiefer, Deputy Chief Economist With Freddie Mac
Kiefer anticipates the currently low mortgage rates to continue throughout next year. “Our forecast is that rates will be relatively flat next year,” he says. But Kiefer says rates may not necessarily stay that way. “They might bounce around a little bit,” he says. And he believes rates “may be modestly higher at the end of next year, but pretty flat over the next 12 months.”
Kiefer believes any change we see in mortgage rates will be tied to the broader economy. “The key thing for the early part of 2021 is going to be what happens with the pandemic,” Kiefer says. “If the economy opens up, we may see interest rates start to rise a little bit.” However, if there’s increased economic uncertainty, that would put downward pressure on rates. One thing to keep an eye on is inflation. Inflation isn’t currently increasing, but if it did, he expects rates to rise in that scenario.
Mortgage Strategies for 2021
Getting a mortgage in February 2021 and securing the lowest possible mortgage rate may still require some patience. While the surge in refinancing applications has slowed somewhat, it was still 46% higher than a year ago as of the first week of February.
So lenders are busy.
But shopping around for the best mortgage lender for your situation remains just as important as ever. Rates vary widely, and the difference between the most expensive and least expensive lenders can be as high as 0.75%, according to a recent study by the fintech startup Haus.
You should also pay attention to the fees when comparing offers. Two loans may have the exact same interest rate, but one could have thousands of dollars in extra fees. So it’s important to read each lender’s Loan Estimate carefully, and to pay attention to both the mortgage interest rate and annual percentage rate (APR).
The type of loan and the loan’s repayment term affect not only your monthly payment, but also your mortgage rate. Shorter-term mortgages typically have lower interest rates than longer-term loans, this is true of both mortgage refinance loans and purchase loans. So a 15-year mortgage will have a better rate than a 30-year mortgage, if all else is equal.
The tradeoff with the lower rate you can get with a shorter mortgage term is that the monthly payment will be higher. Although, a higher monthly payment will allow you to pay off your mortgage more quickly. So ultimately, the decision needs to line up with your current financial situation and your long-term goals.