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Mortgage rates dive back near 3%, opening up refinance opportunities

Clayton Jarvis
·5-min read
Mortgage rates dive back near 3%, opening up refinance opportunities
Mortgage rates dive back near 3%, opening up refinance opportunities

It's something many homebuyers and homeowners have waiting for: The average rate on America's most popular mortgage has fallen sharply, back to the neighborhood of 3%.

Mortgage rates have gone down for the second week in a row and are now at their lowest level since early March, according to the results of a long-running nationwide survey.

Earlier in the year, rates had been on a steady upward trend that had many would-be borrowers wondering if the low-rate bonanza triggered by COVID-19 had run its course.

Not yet. The decline should spark fresh interest among buyers looking for a cheap loan to take some sting out of rising home prices, and homeowners hoping to save money by refinancing their existing mortgages.

30-year mortgages

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The average rate on the 30-year fixed-rate mortgage, the most common choice among U.S. homeowners, slid last week to 3.04%, mortgage giant Freddie Mac reported on Thursday.

Rates are now the lowest in six weeks. The decline from the previous week’s mark of 3.13% was the largest weekly drop since Nov. 19, 2020, when the 30-year fixed rate fell from 2.82% to 2.72%.

But the slide in rates isn't likely to last.

“While [lower rates are] welcome news for homebuyers already grappling with low supply and double-digit price gains, the break could be temporary with the upward trend resuming as the outlook for the economy brightens,” says Realtor.com's chief economist Danielle Hale.

Last year at this time, 30-year rates were averaging 3.31%. This week’s decline may prove to be one of the last opportunities for homebuyers to turn historically low rates into significant savings before the cost of borrowing starts climbing again.

15-year mortgages

The 15-year fixed-rate mortgage, a popular option for borrowers who can afford higher monthly payments, also has seen its rate fall rather dramatically, to an average 2.35% last week from 2.42% a week earlier. One year ago, a 15-year fixed came attached to a rate of 2.80%.

Like its 30-year counterpart, the 15-year fixed rate is trending well below historical averages. Before the arrival of COVID-19, the lowest it had reached was an average 2.72%, and that was back in October 2016.

The 15-year fixed also is a common choice for homeowners with 30-year mortgages who want to decrease the cost of homeownership by refinancing, shortening their loan term and slashing their total interest costs.

5/1 adjustable rate mortgages

Adjustable Rate Mortgage ARM papers in the office.
Vitalii Vodolazskyi / Shutterstock

The average rate on the 5/1 adjustable rate mortgage has taken a tumble, hitting 2.80% last week after averaging 2.92% the previous week.

Current rates on 5/1 ARMs are highly attractive. They’re only a hair higher than the lowest average rate ever recorded: 2.71%. A year ago, the average on a 5/1 ARM was 3.34%.

Adjustable rate mortgages involve both a fixed and an adjustable rate component. For the first phase of the loan, your rate remains the same. After that, it will change periodically.

A 5/1 ARM means a fixed rate for five years and then adjustments to your rate — up or down — every (one) year after that. The rate adjusts in sync with a benchmark interest rate, like the prime rate.

What’s behind the drop in mortgage rates?

Various type of financial and investment products in Bond market.
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Sam Khater, chief economist at Freddie Mac, attributed last week’s decrease in mortgage rates to the friction present in the nation’s improving economy: Consumer demand is increasing, but at a rate supply can’t keep up with.

"As a result of this imbalance,” Khater says, "pricing pressures are building and causing inflation to rise."

Simple enough. But you may be wondering how that inflation impacts mortgage rates.

When inflation ticks upward, the value of government bonds typically falls. As the value of those bonds goes down, their interest rates rise — which increases bond-buying among investors. Banks make more money off bonds, and feel more comfortable taking on the risk associated with lowering their mortgage rates.

But the downward pressure that inflation is putting on mortgage rates this week is not expected to stick around.

“Despite the pause in mortgage rates recently, we expect them to increase modestly for the remainder of this year," Khater says.

Freddie Mac's new quarterly forecast, released earlier this week, projects that 30-year fixed rate mortgages will average 3.2% throughout this year. That's up from the company's previous 2021 forecast of 2.9%.

Time to take advantage?

Happy young african american couple using calculator and laptop for calculating finance rates.
fizkes / Shutterstock

Unless the COVID-19 recovery goes completely and unexpectedly off the rails, this week’s good news around mortgage rates may prove to be little more than a fondly remembered blip.

“This could even be as simple as the market 'taking a break' from the prevailing trend before deciding on the pace and timing of the next move," writes Matthew Graham of Mortgage News Daily.

But even a blip can be an opportunity, especially when it means a cheaper mortgage.

Before you can get in on the lower rate action, you’re going to need to check your credit score, which you can easily do for free. The lowest rates go to borrowers with high credit scores, so find out what yours is today and see if you’ll need to bring it up a few notches before applying for your new or refinance mortgage.

If you’re ready to start checking rates, go all out. Compare offers from as many lenders as possible and try to find the best deal. If you’re pressed for time — and who isn’t? — try to compare offers from at least five lenders.

After you borrow, look for other ways to cut the overall cost of homeownership. When you buy or renew your home insurance, do another round of comparison shopping — to make sure you’re paying the lowest rate possible for your coverage.