Just when it seemed mortgage rates had nowhere to go but up, they’ve fallen again and are now the lowest since mid-February, a long-running survey shows.
This is a welcome development for price-shocked house shoppers who are still able to lock in a sub-3% mortgage rate. It also gives homeowners more time to potentially save thousands with a cost-cutting refinance.
But if the economy’s comeback from COVID starts looking more solid, rates could reverse their downward trend by the end of the summer, some experts say.
The average rate on a 30-year fixed-rate mortgage slid last week to 2.90%, the lowest in nearly five months, mortgage giant Freddie Mac reported on Thursday. That’s down from the previous week’s mark of 2.98%. A year ago, the 30-year fixed was averaging 3.03%.
While rates are above January’s record low of 2.65%, they’re still lower than at any time before the COVID-19 pandemic. But with the economy reopening and inflation starting to warm up, analysts say it’s unlikely rates will fall much below their current level — if at all.
“We expect economic growth to gradually drive interest rates higher, but homebuyers and refinance borrowers still have an opportunity to take advantage of 30-year rates that are expected to continue to hover around 3%,” says Sam Khater, Freddie Mac’s chief economist.
Still, concerns about the fast-spreading Delta variant of COVID-19 are shaking confidence in the economy. Investors are rethinking their once-optimistic economic forecasts, says Matthew Speakman, an economist for Zillow.
“While longer-term changes in rates are likely to be to the upside, the shift in the market’s outlook suggests that rates have little reason to move sharply higher anytime soon,” Speakman says.
Rates on 15-year mortgages — a popular choice for refinance loans — also fell last week, according to Freddie Mac’s survey.
The average was 2.20%, down from 2.26% a week earlier. At this time a year ago, interest rates on 15-year loans were averaging a steeper 2.51%.
Aside from refinancing, 15-year mortgages can make sense for a borrower who is able to make higher monthly payments. The reward is much lower lifetime interest costs.
5/1 adjustable-rate mortgages
Rates on 5/1 adjustable-rate mortgages (ARMs) fell just slightly last week to 2.52%, on average, from 2.54% the previous week. A year ago, rates on 5/1 ARMs were averaging 3.02%.
These loans initially tend to come with lower interest rates than their 30-year fixed-rate counterparts, and that’s in exchange for the risk borrowers take on.
With 5/1 ARMs, you pay a fixed rate of interest for the first five years, then the rate “adjusts” each (one) year. Your mortgage rate could fall, resulting in savings, or it could go up, costing you more.
A homeowner with an adjustable-rate loan will often refinance into a stable fixed-rate mortgage when the introductory period on an ARM ends.
Why rates continue to drop
Mortgage rates tend to follow the direction of U.S. Treasury bond yields, the interest rates the government pays investors. Rates went down last week as Treasury yields slid to five-month lows following news of rising unemployment and other signs the economy’s recovery from the pandemic could be stalling.
Minutes released last week from the Federal Reserve’s late June meeting also had an impact on mortgage rates, says Danielle Hale, chief economist at Realtor.com. The notes indicated the central bank plans to be more patient with future interest rate hikes and other measures that would put upward pressure on borrowing costs.
“In other words, rates slipped as investors realized that the last Fed discussion may not have been as hawkish as was originally believed,” Hale says.
Rates are expected to stay around the 3% mark until at least August, she says, which is the earliest the Fed is likely to provide a timeline for scaling back its purchases of mortgage-backed securities. That buying has helped keep mortgage rates down.
Mortgage rates remain attractive for buyers, homeowners
Though a tight housing market is making it tough for homebuyers to find houses and take advantage of low mortgage rates, some 14 million homeowners still have the potential to save an average $287 a month by refinancing, the mortgage technology and data provider Black Knight has said.
If you’re considering a refi, get a free look at your credit score and see if it could use a boost. The most desirable mortgage rates are generally offered to homeowners with scores between 720 and 850. That range suggests you’ve demonstrated responsible credit use.
If your credit’s in good shape, shop around for the best loan. Studies from Freddie Mac and others have found that comparing at least five mortgage offers can result in thousands of dollars in savings over time.
When you apply for a mortgage, lenders will want to see that your cash flow is steady enough that you’ll be able to afford your monthly payments. If you already have a bunch of high-interest debts, consider rolling those balances into a single, lower-interest debt consolidation loan.
If it turns out you won’t be able to swing a refi, you have other ways to cut the costs of homeownership. When you renew your homeowners insurance, get quotes from multiple insurers and compare them. You might just find you’re paying more than you should.