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In 2020 we saw mortgage rates hit one record low after another. But many experts expect rates to rise in 2021.
As the economy begins to reopen, we should see mortgage and refinance rates grow. But that doesn’t mean rates will shoot up overnight.
That means those looking to buy a home, and homeowners who haven’t refinanced, still have a chance to lock in exceptionally low rates. 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
Since the beginning of the year, the average 30-year fixed mortgage rate has increased roughly 0.4%, according to Freddie Mac, and could continue to creep higher. “Our long-term view for mortgage rates in 2021 is higher,” 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 since March of 2021, has hovered between 1.5% and 1.7%. “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 access to the Coronavirus vaccine. “Mortgage rates should rise as we are in the early stages of getting our economy working again,” says Logan Mohtashami, housing data analyst at HousingWire.
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.”
Will Mortgage Rates Go Up in Late-2021?
Right now, mortgage rates are in a holding pattern. Average 30-year rates have only varied by 0.10% over the past two months. And the average 15-year fixed mortgage rate has stayed within a narrow 0.09% range over the same time period.
It looks like the current mortgage rate trends could continue, as some experts forecast mortgage rates to stay flat in June 2021. There are a number of competing factors pushing and pulling on rates. Inflation looks to be growing, which would normally increase rates. But many believe what we’re seeing is only temporary inflation. The economy looks like it has turned a corner and unemployment is going down, but the Federal Reserve wants to keep rates low for the foreseeable future.
Early in the year we saw rates increase to 3.18% and then fall back down to under 3%. So if you’re in the market for a new house or are looking to refinance your current mortgage you can still secure a good rate, 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 June 7, 2021, the average 30-year fixed mortgage rate is 2.99%, 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. “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. 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,” he says.
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 2.65% we saw in early 2021 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 mortgage 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,” 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 latter 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. If inflation increases, he expects rates to rise in that scenario.
Mortgage Strategies for the Upcoming Months
Low mortgage rates and low housing inventory have created a frenzy of activity in the real estate and mortgage industries. Homebuyers across the country are competing for the few homes for sale, creating bidding wars and driving up home prices. At the same time, current homeowners are content to wait out the storm since they can refinance their existing mortgages and lock in lower interest rates for the long term.
If you’re in the market for a new home or are considering refinancing your mortgage, here are a few tactics to ensure you’re making the right decision for you.
Be prepared to move quickly
Homebuyers in today’s real estate market don’t have the luxury to dilly dally over a decision on whether or not to make an offer on a house. So you need to head into your home search with everything lined up in advance.
The most important item to take care of is getting preapproved for a home loan. A full preapproval involves having a lender review your credit and other financial information. But once you’re preapproved, you’ll know how much house you can afford, and having a preapproval letter shows the seller that you’re a serious and qualified buyer.
Make the best offer you’re comfortable with
When you’re competing against a dozen other people for a house it can be tempting to increase your offer or to waive certain buyer contingencies to make your offer more appealing. But you shouldn’t do this without understanding the consequences.
If home prices are rapidly rising in your area, consider starting your home search with properties listed below your home buying budget. That way you can comfortably raise your offer amount without paying more than you can afford.
When making an offer you should also carefully consider what contingencies you will include or waive, if any. Waiving an appraisal contingency means that if the appraised value is less than your offer price, you could have to pay the difference out of pocket or risk losing your earnest money deposit. So be sure you fully understand and accept all of the risks associated with waiving contingencies beforehand.
Shop around and negotiate
When you’re shopping for a mortgage, it’s important to get quotes from multiple lenders. 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. But you can’t just focus on the rate, the closing costs are also important.
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).
If you have multiple offers to compare, it may be easier to talk to a lender and negotiate the rate or fees.
Do the math for a refinance
In many ways, refinancing a mortgage is much easier than purchasing a home, especially in this market. However, you should approach a mortgage refinance with the same due diligence as you would a home purchase. Paying attention to your refinance rate, the fees and also how long you plan to keep the new loan.
One general guideline to follow is to refinance your home loan when you can reduce your interest rate by 1% or more. However, there are other factors to consider on top of that. You want to make sure that you’ll be keeping your home long enough for the savings from refinancing to outweigh upfront closing costs. One way to calculate this is to take the upfront fees (even if they were added to your loan balance with a no-cost refinance) and divide them by your monthly savings. So if you had $10,000 in refinance closing costs and your monthly payment is $300 less, then it would take roughly 34 months, or just under three years, to break even.
The loan’s repayment term affects not only your monthly payment, but also your mortgage rate. Shorter-term mortgages typically have lower interest rates than longer-term 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.
Mortgage Rates Frequently Asked Questions
What are current mortgage rates today?
For today, Saturday, July 31, 2021, the average 30-year fixed mortgage rate is 2.980% with an APR of 3.220%. The average 30-year fixed mortgage refinance rate currently is 2.970% with an APR of 3.160%.
Looking at mortgages with shorter loan terms, currently, the average 15-year fixed mortgage rate is 2.280%, with an APR of 2.610%. And the average 15-year fixed refinance rate is 2.280%, with an APR of 2.520%. The average 20-year fixed mortgage rate is 2.830%, with an APR of 3.050%. And the average 20-year fixed refinance rate is 2.850%, with an APR of 3.030%.
For adjustable-rate loans, we are seeing the average 5/1 ARM loan rate of 2.800% with an APR of 3.920%.
Will mortgage interest rates go down in 2021?
Mortgage rates move up and down from day to day and week to week. And even though rates have dipped in the past few months, that doesn’t appear to be a long-term sustainable trend.
The economy and employment rates look like they will continue to improve for the rest of 2021. And those numbers should put upward pressure on mortgage rates. So even if rates don’t skyrocket, it’s unlikely that we’ll see a continued drop in rates, barring an unexpected surprise.
What is a good mortgage rate?
A good mortgage rate depends a lot on your personal situation and the type of mortgage you’re getting. Loans for second homes or investment properties typically have higher rates. And if you’re doing a cash-out refinance, you should also expect to have a slightly higher interest rate.
Right now, average 30-year fixed rates are around 3%, and the 15-year fixed rate average is about 2.3%. Even though these are slightly higher rates than we had six months ago, from a historical perspective they are still amazing. Your credit score and loan-to-value (LTV) ratio factor into what rate you’re eligible for. But even if your credit score is lower than you’d like, an interest rate of 3.5% or 4% is still an affordable rate compared to what rates have been in the past.
What do 10-year Treasury bond yields have to do with mortgage interest rates?
One of the key indicators for what direction mortgage rates will go is the long-term Treasury bond rate, specifically, the 10-year Treasury bond yield. As rates on these bonds increase, you’ll typically see a corresponding increase in mortgage rates, and the same applies to a decrease in the interest rate.
Once a mortgage is originated, it often is sold off to an investor in the form of a mortgage-backed security, or MBS. Long-term Treasury bonds and MBS are purchased by the same type of investor. So as demand for these types of investments ebbs and flows, their rates move in tandem. Although, MBS rates are higher than 10-year Treasury bond rates because mortgages are a more risky investment.