It was only a matter of time, but mortgage rates may finally go the way many homebuilding experts expected to rise sharply.
Rates for the most popular types of mortgages in America soared sharply last week, according to a poll.
Homeowners who pulled the trigger on refinancing before last week, when rates were well below 3% for several months, can now rejoice in both their savings and their foresight. Those who postponed refinancing because they expected rates to fall further should view the increase last week as a wake-up call.
Even at today’s elevated levels, mortgage rates remain very attractive. But there is no reason to believe that last week’s rise will be the last that borrowers will see this year.
30 year fixed rate mortgage
The average interest rate on 30-year fixed-rate mortgages jumped from 2.88% to 3.01% last week, mortgage giant Freddie Mac said Thursday.
It was the biggest weekly gain since mid-February when optimism first surfaced about the country’s COVID-19 vaccination program.
Sam Hather, the chief economist at Freddie Mac, says the sharp hike in rates last week was partly due to a sharp rise in interest rates on Treasury bonds, in particular on 10-year Treasury bonds. When the yield on 10-year bonds rises, mortgage fixed rates tend to rise.
“Many factors led to this increase,” adds Hather, “including the Federal Reserve, which said it would scale back its support for capital markets, rising inflation and emerging energy shortages that will exacerbate labor and material shortages.”
The Fed recently said it could soon cut tens of billions of dollars in monthly purchases of Treasury bonds and mortgage-backed securities. They have been a COVID tonic for the economy and have helped keep mortgage rates low.
15 year fixed rate mortgage
The average rate on fixed mortgages for 15 years also increased last week from 2.15% to 2.28%.
But even with the increase, 15-year loans are still a better deal than last year, when the average was 2.36%.
The 15-year rate hike is especially relevant for homeowners as loans are a popular choice for refinancing. A shorter-term means that you will pay much less interest over the term of the loan, but it also means a higher monthly payment.
It is important to remember that the rates mentioned above are average and some lenders offer 15-year rates below average – in some cases below 2%.
5 Year Adjustable Rate Mortgage
It should not be forgotten that rates on five-year adjustable-rate mortgages (5/1 ARM) also rose last week to 2.48% from 2.43% a week earlier.
At the same time last year, the typical ARM 5/1 was gaining 2.90% stiffness.
ARM has two phases. During the first, they come with fixed interest rates, which are usually lower than the interest rates on mortgages for 15 or 30 years. Thereafter, interest rates are adjusted – up or down – at a predetermined time.
So ARM 5/1 starts with a five-year flat rate period. After that, your interest rate will be adjusted once a year.
Mortgage rates don’t go up
After nearly four straight months of 30-year mortgage rates below 3%, “it looks like rates in the 2% range are probably over,” writes Nadia Evangelu, senior economist and director of forecasting at the National Association of Realtors.
Many reasons have to do with the Federal Reserve System.
In addition to cutting bond purchases in the coming months, the Fed may raise its benchmark interest rate as early as next year. During the pandemic, the central bank kept rates close to zero, and this had some impact on mortgage rates.
As the Fed also reported economic growth in the second quarter was an impressive 6.7%, according to Washington-based real estate chief Corey Burr, “it’s a miracle that growth hasn’t picked up anymore.”
Burr of TTR Sotheby’s International Realty believes that if the Fed aggressively cuts bond purchases, the economy will grow at more than 5% per year and inflation remains high, mortgage rates “are sure to face upward pressure in 2022.”
A ton of money is just around the corner next year that homeowners could save by refinancing their mortgages, which could soon start to get smaller and smaller.
How to set a low refinancing rate now
Getting the lowest mortgage rate from a lender usually requires a little work, but the savings are worth it. A recent study found that nearly half of homeowners who refinanced during the year ended April cut their monthly mortgage payments by $ 300 or more.
The lowest rates are usually given to borrowers with the strongest credit history. So, start by checking your credit score, which you can easily do for free. You may find that your credit rating is lower than you expected and that you need to improve it before you run the risk of getting a not-so-good mortgage rate.
Lenders tend to avoid borrowers who have too much pesky high-interest debt. You may want to consider converting these loan balances into a lower interest debt consolidation loan to lower your interest expense and pay off debt faster.
When you’re ready to make your mortgage purchase, be sure to compare offers from at least five lenders. Research by Freddie Mac and others has shown that five is the magic number for maximizing your refi savings.
If you are not interested in refinancing, there are other ways you can reduce the cost of homeownership. When it comes time to buy or renew homeowner insurance, a little shopping comparison can help you save hundreds of dollars a year.