Mortgage rates have fallen for three weeks in a row, but the retreat is just a head fake, the Mortgage Bankers Association says. The group expects rates to rise to 3.7 percent by the end of the year, and then to move past 4 percent in 2022.
“With mortgage rates going higher, we’re going to move from a refi-dominated market to a purchase-dominated market,” Mike Fratantoni, the group’s chief economist, said Thursday during the Mortgage Bankers Association’s spring conference.
Mortgage rates plunged to record lows in January, then climbed sharply in February and March. This month, they’ve retreated a bit — mortgage giant Freddie Mac said Thursday that rates are below 3 percent again, while Bankrate’s national survey of lenders has the average 30-year mortgage at 3.21 percent. (The difference is because Bankrate includes origination points while Freddie Mac reports them separately.)
Fratantoni predicts rates will jump as a result of a strong rebound in the economy and rising inflation. He says consumers have stashed trillions of dollars in banks since last year, and they’re ready to start spending with a vengeance. With all that cash moving back into the economy, Fratantoni predicts inflation will climb “well above 3 percent.”
“Inflation is going to be higher than we’ve seen in decades,” Fratantoni says.
He also expects home prices to keep rising. Fratantoni predicts home price appreciation will hit 10 percent this year, as supply shortages offset the effects of rising mortgage rates. “We don’t think it’s going to move high enough to have an impact on purchase borrowers,” he says.
What refinancers can do
The association’s forecast means the clock is ticking for refinancing. If you haven’t swapped your mortgage recently, here are some steps you can take:
Set a clear financial goal. There should be a good reason why you’re refinancing, whether it’s to reduce your monthly payment, shorten the term of your loan or pull out equity for home repairs or debt repayment. If you’re reducing your interest rate but restarting the clock on a 30-year mortgage, you may end up paying less every month, but more over the life of your loan. That’s because the bulk of your interest charges are in the early years of a mortgage.
Check your credit score and history. You’ll need to qualify for a refinance just as you needed to get approval for your original home loan. The higher your credit score, the better refinance rates lenders will offer you — and the better your chances of underwriters approving your loan. It may make sense to spend a few months boosting your credit score before you start the refinancing process. Also, mortgage borrowers’ credit scores have risen to record highs as the pandemic made lenders stricter about extending credit.
Determine how much home equity you have. Your home equity is the value of your home in excess of what you owe your mortgage lender on your loan. To figure it out, check your mortgage statement to see your current balance. Then, check online home search sites or get a real estate agent to run an analysis to find the current estimated value of your home. Your home equity is the difference between the two. For example, if you still owe $250,000 on your home, and it is worth $325,000, your home equity is $75,000. You may be able to refinance a conventional loan with as little as 5 percent equity, but you’ll get better rates and fewer fees if you have more than 20 percent equity. The more equity you have in your home, the less risky the loan is to the lender.
Don’t forget to factor in closing costs. Closing costs can add up to as much as 4 percent of the amount of the loan, so make sure you’ll save enough in lower monthly payments to offset the cost of the new loan.