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Even as experts predicted mortgage rates would rise in 2021, the rates continued to hit new lows. Now, many are certain those days are almost over.
Fueled by an economy crawling out of the COVID-19 pandemic, rates are likely to continue gently rising throughout the year. However, this doesn’t mean you’ve missed your chance to purchase or refinance.
While rates are rising, they still will remain low. By the end of the year, some experts believe rates will be around 3.5%, while they currently hover around 3%. Read on to learn more about how rates are set, and why they are likely to continue rising.
What are mortgage rates?
Mortgages rates usually are one of the most important considerations for homebuyers who want a mortgage loan. These rates indicate the interest charged on a mortgage. You can opt for either a fixed-rate mortgage, which stays the same for the term of the mortgage, or one that fluctuates with a benchmark rate.
At the start of the year, 30-year fixed rates had hit their lowest in history, at 2.65%. For context, in January 2020, before the pandemic, rates were at 3.62%. The highest recorded rate was in October 1981, at 18.45%, due to inflation.
Rates fluctuate for many reasons. While your rate will be determined by your lender, the mortgage rate factors that are out of your control are based on the state of the economy and mortgage-backed securities (MBSs). The other portion is based on your level of risk to the lender.
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How are mortgage rates set?
There are several factors at play when it comes to mortgage rates. The rates constantly fluctuate based on economic elements such as inflation and job growth. For example, the extraordinary rate rise to 18.45% in 1981 was due to inflation caused by rising oil prices, wages, and more, which pushed up the price of goods and services.
On the other hand, the record dip to 2.65% at the beginning of the year was due to the pandemic’s impact on the economy, leading to continuously high unemployment rates.
Other rate factors besides job growth and inflation include:
- Stock prices
- Home sales
- Retail sales
- Corporate earnings
So why are rates rising again? And who or what directly sets the rates? Well, the ongoing vaccine rollout plus an additional stimulus check has helped boost the economy a bit. People are confident the virus soon will be better under control, meaning there will be an ensuing economy boost.
As far as where the rates themselves come from, mortgage rates are largely based on mortgage-backed securities and mortgage bonds, which are directly affected by national and global news events.
What personal factors affect mortgage rates?
Non-controllable economic factors aside, you can help yourself get a great rate by improving your personal finances. Mortgage lenders usually will determine your rate based on three main factors:
- Credit score and report
- Down payment amount, or loan-to-value ratio (LTV)
- Debt-to-income ratio (DTI)*
With a high credit score and low DTI ratio, you will be able to snag the best rate despite the larger circumstances at play.
If you need assistance in any of those areas, working closely with a home.com by Homefinity loan officer will help you get where you need to be. Your dedicated loan officer will offer honest recommendations and advice to get you the best rate possible, whether you’re purchasing or refinancing.
*Debt-To-Income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
Why are the rates likely to continue rising?
Considering the dire circumstances of the past year, these rising rates are actually a good thing. They show us that things might be starting to stabilize, so the economy can begin to recover.
Experts also seem to be adamant about reminding people that despite the rising rates, they will remain low enough for now that you still can capture a great rate.
With that being said, the largest driving factors and indicators of current rates include inflation, COVID-19 relief efforts, and 10-year Treasury bond yields.
As businesses reopen and consumers start spending again, the result will be higher inflation. As we’ve seen, inflation can drastically affect mortgage rates. However, the current issues rest more with building and housing costs than rates.
With the lower rates last year, demand for housing increased. There’s a low supply of housing to meet this demand, because construction costs increased as supplies decreased during the pandemic.
While these supply and demand factors all will push mortgage rates higher, there’s big competition for housing that is pushing costs even higher. However, even if competition is tight in your area for housing, millions of homeowners can benefit from refinancing. Work closely with your loan officer to determine the right options for you.
2. COVID-19 relief
With another stimulus package approved in March, more support in the works, and the ongoing vaccine rollouts, there’s greater optimism that the nation will soon be able to return to some form of normalcy.
This optimism, paired with receiving an actual check in the mail, helped give the economy a boost. Even if people put the money into savings or used it to pay down debt, they are putting themselves in a better position moving forward to spend.
As more people become vaccinated, businesses reopen, and employees are able to return to work safely, the economy will continue to improve. And, as a result, mortgage rates will rise.
3. 10-year Treasury bond yields
While MBSs directly influence mortgage rates, a good indicator for borrowers is the 10-year Treasury bond yield. The bond yields reveal market trends: If the bond yield drops, mortgage rates usually will drop, too, and if they rise, mortgage rates also usually rise.
In anticipation of the economy boost, bond yields have recently spiked. While this point isn’t a direct driving factor such as inflation or stimulus packages, experts do track these rates to get an idea of where mortgage rates are headed.
home.com by Homefinity is ready to help
Deciding when to purchase or refinance can be confusing — especially during a pandemic. But you don’t have to do it alone. The loan officers at home.com by Homefinity are ready to meet you wherever you are in the process, whether you are just starting to sort through your finances or are interested in refinancing.Reach out to us today to start receiving the support and expert advice you need. We look forward to working with you.