What's in this article?
After a stretch of ultralow mortgage rates last year, higher rates are coming. Why does this happen? And is any of it within your control?
Mortgage rates are affected by many factors — some of which we can control, but a large amount we can’t. Controllable factors include a borrower’s credit score, for example, while the rest is determined by market forces.
We’ll dig into how the fluctuating market forces are influenced, and how these trends can affect purchase and refinance loans.
How are mortgage rates determined?
Mortgage rates fluctuate daily based on the state of the economy overall, including inflation, job growth, home sales, stock prices, and more. You may have learned at some point that the Federal Reserve or Treasury yields set mortgage rates, but this isn’t true. These rates are set in reaction to the same economic factors affecting mortgage rates.
Mortgage rates are largely based on mortgage bonds and mortgage-backed securities, which are directly driven by national and global news events.
In short, mortgage rates right now have been heavily influenced by the consequences of the COVID-19 pandemic. Read on to learn more about how this has affected the market and how to navigate the rate fluctuations.
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What type of economic factors cause higher mortgage rates?
Economic factors such as higher inflation and low unemployment rates generally drive mortgage rates higher. The higher mortgage rates we are seeing right now are the result of a bit of relief after months of high unemployment rates.
Other factors besides unemployment and rising inflation include:
- Retail sales
- Home sales
- Corporate earnings
- Stock prices
The stay-at-home orders and layoffs that occurred at the beginning of 2020 are what sparked last year’s recession and super low rates. Mortgage rates were steadily declining in 2020, but toward the end of the year, they began to pick up again.
Stocks were soaring due to the presidential election, improving job market, and a vaccine on the horizon. Then, rates dipped again due to another spike in virus cases once the weather got colder and vaccine distribution became uncertain.
Why would higher mortgage rates be happening right now?
Now, rates have been steadily increasing during the past several weeks. The vaccine is being distributed, and there are promises of a larger stimulus relief package and changes in the housing market from the new administration.
Plus, during the low rates, there became a strong demand for larger suburban homes that hasn’t let up since rates have increased. People are seeking more space since they need to spend more time at home, and many have had to relocate to find jobs. Homebuyers are staying away from cities, where the virus was hitting the hardest and opportunities became scarce.
How do higher mortgage rates affect refinancing?
With higher mortgage rates comes less opportunity for savings when refinancing. The rush to refinance during historically low rates may slow, but so far, the demand from homebuyers is remaining the same in their search for larger homes.
Refinancing your home, which means replacing your current mortgage with a new one, still can be a smart choice. Even if rates are beginning to rise, Freddie Mac experts are predicting that the rates will remain low — since they have a long way to go before reaching historic highs again.
At any rate, refinancing is an opportunity to focus on those aspects of mortgage rates you can control, such as your credit score. This can help you understand your personal financial situation, including savings, income and employment, as well as improving your credit score.
You can work with a mortgage loan officer to discover your refinance options, which can include the following:
- Reducing your monthly mortgage payment
- Cashing out some of your home equity to help with debts or large expenses
- Switching to a different mortgage loan type
A Homefinity mortgage loan officer can answer your questions and walk you through the process. They also will have insight into the housing trends for 2021 that can help you make your decisions.
Potential mortgage and housing trends for 2021
Experts are in agreement that although mortgage rates are up due to improved economic spending and inflation caused by supply chain shortages, these factors are temporary. The economy’s overall status, driven by the ebbs and flows of COVID-19’s global impact, still should keep rates low throughout 2021.
These lower-but-rising rates will create plenty of refinance and buying opportunities, but there’s currently a struggle with supply and demand that is likely to continue for a while. This includes shortages of building supplies and materials, as well as the buyer demand currently outweighing seller demand.
As these shortages and demands balance themselves throughout the year, sellers should grow more comfortable with the market and new construction is likely to pick up. The experts also agree that the moving-to-the-suburbs trend will most likely continue.
Refinance or find your dream home with the help of a dedicated loan officer
If you’re looking to purchase or refinance this year, we can help. The first crucial step will be to speak with a mortgage loan officer for guidance as you dig into your full financial picture and determine how much home you can afford.The professionals at Homefinity want to help you find your dream home or refinance. Reach out to us today so we can help guide you every step of the way.