Mortgage rate forecast for December 2021: Higher rates likely, with a COVID wildcard

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Santa Claus may be coming to town, but he’s likely bringing higher mortgage rates with him. Approaching the holidays, all signs pointed to rising rates in the days and weeks ahead — at least until a new coronavirus mutation sparked new fears that the pandemic might enter a new phase.

The World Health Organization warned Sunday that the omicron variant poses “very high” global risk — and is likely to spread internationally. While it’s too soon to know the effect on mortgage rates, this latest twist means the pandemic could continue to roil consumer spending, disrupt travel plans and frighten investors. The coronavirus scare of 2020 sent mortgage rates to record lows, and a new round of uncertainty could cloud the rate picture.

In January 2020, the average rate on a 30-year mortgage fell below 3 percent, according to Bankrate’s national survey of lenders. But by New Year’s Eve, those rates may have increased by 40 basis points — if the omicrom variant proves mild.

What kind of rate can you expect for your upcoming mortgage purchase or refinance loan? We’ve talked to the experts and gotten their rate predictions for December and beyond.

Dreaming of a white Christmas (and lower rates)

The warning signs about increasing inflation haven’t subsided in recent weeks, leaving many industry insiders pessimistic about the mortgage rate environment, even if recent jobs reports look promising, wider economic data appear bullish, and the recently passed infrastructure bill appears to be a step in the right direction.

“With inflation elevated and the Federal Reserve holding true to its promise to begin tapering bond purchases, mortgage rates will continue moving higher by the end of the year,” says Greg McBride, Bankrate’s chief financial analyst.

He foresees the 30-year fixed rate clocking in as high as 3.5 percent, on average, compared to an average rate of up to 2.7 percent for a 15-year mortgage, by the end of the month.

Nadia Evangelou, the senior economist and director of forecasting for the National Association of Realtors, is firmly in McBride’s camp.

“Inflation has risen to its highest point since 1990. If it remains elevated for a longer period, that will drift up mortgage rates even higher,” she says. “Meanwhile, the Fed will slowly reduce its monthly bond purchases. This strategy is expected to move up bond yields, as the supply of these bonds will increase in the broader economy and bond prices will drop. Following the trend of the 10-year Treasury yield, mortgage rates will go up as well.”

Len Kiefer, deputy chief economist for mortgage giant Freddie Mac, says his organization also expects elevated rates this month, but perhaps not quite as high as others anticipate.

“We forecast that the 30-year fixed mortgage will be around 3.2 percent in December. This forecast implies that rates will be headed higher in the near term,” says Kiefer. “Mortgage rates generally follow U.S. Treasury yields, and we expect that these will continue to increase – although at a modest pace. Treasury yields are higher due to a variety of factors, including a recovering economy, higher short-term inflation, and anticipated tightening of monetary policy.”

While Freddie Mac doesn’t forecast the 15-year mortgage rate, Kiefer says you can expect this shorter-term mortgage to follow the same trends as its 30-year counterpart.

Ringing in rate projections for 2022

Eager to learn if higher December rates are just a fluke? Brace yourself for bad news: Several factors point to further rate jumps in the first quarter of 2022.

“Mortgage rates will continue to rise in the year ahead due to elevated inflation. When inflation increases, lenders demand higher interest rates as compensation for the decrease in purchasing power,” Evangelou says. “Also, consider that the job market continues to recover. Mortgage rates tend to rise when employment grows and the unemployment rate falls.”

Consider, too, that the Fed’s own projections indicate a likely interest rate increase or two in 2022. But if inflation continues to grow at its present pace, this rate hike may come sooner than expected next year.

“And when the Fed increases its interest rates, banks do, too. When that happens, mortgage rates go up for borrowers,” adds Evangelou, who believes the 30-year mortgage and 15-year mortgage will average 3.5 percent and 2.8 percent across 2022.

McBride says the uptrend in rates will be limited, however, by occasional bouts of market volatility and worries about slower economic growth in 2022.

“Nevertheless, continued economic expansion, elevated inflation, and a less stimulative Federal Reserve are all suggestive of higher, rather than lower, mortgage rates in the year ahead,” says McBride, who predicts rates respectively inching up to 3.6 percent and 2.8 percent for the 30-year and 15-year mortgage loan, on average, by the end of March 2022. “If the perception is that the Fed is behind the inflation curve, this will fuel an uptick in rates.”

If Kiefer’s calculation that the 30-year rate will average 3.4 percent in the first three months of 2022 proves correct, that means rates will have reached their highest level since the pandemic hit in spring 2020.

“The good news is that higher interest rates will reflect a stronger economy that continues to recover and return toward normalcy,” says Kiefer. “Of course, negative surprises on the pandemic could lead to lower interest rates, but continued progress on COVID-19 would likely yield higher rates. The market has so far shrugged off high recent inflation readings, interpreting much of the higher recent inflation to be transitory; but if market participants begin to view inflation as more persistent, that could result in higher rates.”

Our panel of pros isn’t alone in their prognoses for costlier mortgage loans next year. In its most recent forecast, Fannie Mae anticipates the benchmark 30-year fixed-rate mortgage to average 3.2 percent in the first quarter of 2022 and 3.3 percent throughout the entire year. The Mortgage Bankers Association foresees rates averaging 3.3 percent in the first quarter and 4.0 percent for the full year of 2022. And according to Selma Hepp, deputy chief economist for CoreLogic, the 30-year fixed rate should hover around 3.4 percent by the end of 2022.

Gift yourself a home or refi now, if you’re ready

Purchasing a home is a major commitment that no one should rush into. But in today’s hot market, home buyers may need to move decisively after carefully considering their financial situation.

“With mortgage interest rates and house prices forecasted to increase over the next year, purchasing today will likely be more affordable than waiting,” suggests Kiefer. “Prospective buyers will want to consider their current credit profile and household balance sheet first, as well as how long they plan to stay in their new home, what their current employment situation is, how much other debt they have to service, and how well they have been able to manage their payments on existing debt obligations.”

Evangelou agrees.

“It makes sense to wait only if mortgage rates or home prices are going to fall, which isn’t likely going to happen in the year ahead,” she says. “Meanwhile, rent prices have increased, and they may rise even further as demand for rental homes gets stronger. Thus, I advise potential buyers to lock in a rate now.”

If refinancing is on your radar, now is the time to act, assuming your financial house is in order, McBride advises.

“Even with the recent rate increases, refinance rates are still lower than anything seen before the summer of last year,” he says. “Don’t let the opportunity pass you by. Particularly with the cost of so many other things on the rise, the ability to trim your mortgage payments in a meaningful way can create valuable breathing room in your household budget.”

Don’t let the prospect of a more expensive rate environment spoil your holiday cheer.

“By historical standards, mortgage interest rates remain super low,” Kiefer explains. “Rates would have to increase by nearly 2 full percentage points to match the highest they’ve been in just the past five years.”

Learn more:

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