Mortgage rates were historically low for most of 2020, but as the pandemic recovery gathers steam, that is changing. Rates have mostly been climbing in 2021, and that trend is likely to continue through the year as more folks get vaccinated and back to work.

But that doesn’t mean mortgages are about to become unaffordable either. Many people will still be able to secure great loan rates compared with pre-pandemic times, and millions of homeowners could still potentially save by refinancing their loan before rates move even higher.

Why rates dropped so low

The economy is complicated, so there isn’t a totally cut-and-dried explanation for why mortgage rates were so low last year, but the simplest way to understand it is because Treasury rates went down.

“Mortgage rates typically follow the 10-year,” said Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association (MBA). “This hit to the Treasury rates came at a time when we already started to see rates come lower in the beginning of 2020 and there was already the start of some refi wave.”

For much of 2020, economic uncertainty kept Treasury rates suppressed, which encouraged low mortgage rates, too. The 10-year Treasury generally tracks fixed mortgage rates.

Where rates could head in the next few months

The days of sub-3 percent mortgage rates are probably over for now. Getting the pandemic under control is in the foreseeable future for the U.S., which means the economy is going to start getting back to some kind of normal in the months ahead.

“Our forecast right now is to see rates continue to increase,” Kan said. “Between now and the end of the year, looking for another 50 basis points of an increase because economic growth is expected to continue at the current pace or pick up.”

MBA predicts that the average rate on a 30-year fixed loan will be 3.6 percent by the end of 2021. But the rise shouldn’t be quite as sudden as the falloff was last year.

“It’s been a gradual increase because in the second half of last year there was still a lot of uncertainty over the vaccine and how quickly things would reopen,” Kan said. “On aggregate things have come back pretty well. Of course there are households that are still suffering, but on aggregate, things turned around a lot faster than most expected.”

What’s pushing rates higher

As businesses reopen and consumers start spending more in the hospitality sector again, mortgage rates are likely going to keep climbing gradually throughout the year.

Increasing consumer demand may squeeze supply chains and result in more inflation. The result is almost certain to be higher mortgage rates ahead.

“In addition to that because of this potential for a bigger jump in growth, we’ve seen inflation move higher, the prices that consumers pay for goods and services,” Kan said. “We’ve already seen a lot of reports from builders that, with the high demand for housing, not only do we have a low supply of housing, but the costs to build are going up,” he added. “That’s all going to act together to push rates higher, faster.”

For homebuyers, rising rates shouldn’t have as big an impact as increasing prices. An ongoing housing shortage has made for a strong seller’s market, and although mortgage rates are gradually climbing, the bigger squeeze for housing affordability seems to be coming in the form of competition from other buyers.

“Obviously home price growth has been extremely high and looks to be accelerating, but we don’t see rates as a significant factor in that yet,” Kan said. “If rates go higher faster, it’s possible” that could have more of an effect.

How many people could still benefit from refinancing

Many millions of homeowners.

But it’s not quite that simple. Data firm Black Knight reported this month that 11 million homeowners stand to save by refinancing, but that doesn’t necessarily mean the savings make the process worth it for all those borrowers.

“If I have 10 years left and I refinance into a lower rate but that adds another 5, 10, 20 years to my mortgage, is that worth it to me?” Kan said. “Yes we could look at how many borrowers out there could refinance,” but there are other factors to consider.

Aside from borrowers who are close to paying off their current loan, it also doesn’t make sense to refinance if you could move and turn a profit on the house. Because competition among buyers is so high, for some it may make sense to use this opportunity to upgrade or downsize instead.

Bottom line

The rock-bottom days for mortgage rates seem to be over, but that doesn’t mean they’re not still low by historical standards. Rates are likely to keep rising this year, but should stay affordable for many borrowers for the foreseeable future. However, if you have a somewhat recent loan, you may want to explore your options for refinancing before rates rise above a level that could yield you significant savings.

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