Why the Mortgage Refinance Window Could End Soon

Couple in front of their home
Photo by Monkey Business Images / Shutterstock.com

Originally published by Jeff Ostrowski on Bankrate.com.

American homeowners will refinance mortgages worth nearly $1.8 trillion this year as they lock in historically low rates. However, the window of opportunity for refinancing into super-cheap loans could be closing.

Many housing economists now expect mortgage rates to edge up gradually from recent record lows.

Mike Fratantoni, chief economist at the Mortgage Bankers Association, said Wednesday that he expects the average rate on a 30-year mortgage to rise to 3.5% by the end of 2021.

If the scenario plays out as he predicts, refinancing will lose its appeal for many homeowners. The Mortgage Bankers Association expects refi volume to fall to $946 billion in 2021 and to $573 billion in 2022.

“Looking back on this years from now, you will remember 2020 as an absolute banner year for this industry,” Fratantoni said during the Mortgage Bankers Association’s annual conference.

A 3.5% mortgage is still low by historical standards. However, it would be high enough that far fewer homeowners would be enticed into refinancing, given the time commitment and costs associated with swapping mortgages.

The Mortgage Bankers Association’s forecast is a bit more optimistic than others’ outlooks, but not dramatically so.

“While I do not think that rates will climb that high that fast, it is realistically possible — and refis will all but cease if rates hit 3.5%,” says Ken H. Johnson, a housing economist at Florida Atlantic University.

Economic recovery would push rates up

A key assumption in the Mortgage Bankers Association’s forecast is that the U.S. economy will continue its robust recovery. Unemployment soared to 14.7% in April but fell to 7.9% as of September.

Fratantoni expects unemployment to continue to decline, hitting 7.5% this year and 6% next year. That’s still high, but well below the calamitous levels of joblessness early in the coronavirus crisis.

Of course, the U.S. economy could take other paths. If a resurgence of COVID-19 cases causes new lockdowns, job growth would stall and mortgage rates would not rise so quickly, Fratantoni says.

His forecast calls for continued weakness in the leisure and hospitality sectors, but also for continued strength in white-collar industries that have shifted to remote work.

Government stimulus could pressure rates

A worldwide wave of stimulus packages also plays into the Mortgage Bankers Associations’ calculus. The U.S. government has spent trillions of dollars on such stimulus initiatives as generous unemployment benefits and forgivable loans to employers.

“This is an incredible amount of debt,” Fratantoni says. “The Treasury has had to auction $4.5 trillion dollars of debt this year.”

With developed nations around the world pumping out debt, governments will be forced to offer more generous yields to attract investors, he says. That matters to the mortgage market because the rate on 30-year mortgages is closely tied to the rate on 10-year Treasury debt.

While yields on 10-year Treasurys remain low — 0.813% as of Wednesday — they have ticked up in recent months as the economic outlook has brightened.

“Mortgage rates can be expected to rise as they tend to move with the yield on 10-year Treasury notes,” says Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego. “Although the Federal Reserve tightly controls short-term rates, it has much less influence on long-term rates. As the economy recovers, spurred by the expected arrival and implementation of a vaccine next year, long-term rates, including mortgage rates, will move higher.”

In another factor pressuring mortgage rates upward, Fratantoni sees mounting deficits spurring inflation. Mortgage rates are tightly correlated with inflation, so rising prices could also trigger higher mortgage rates.

What you can do

Early in the coronavirus recession, the smart move for homeowners looking to refinance was to wait. Patient homeowners were rewarded as rates fell to one record after another.

The savvy play now might be to lock in a refi in case rates start to rise. The best strategies include:

  • Shop around. There can be wide variances in rates and closing costs from lender to lender, so seek multiple proposals.
  • Calculate your breakeven point. Closing costs add up quickly — they can be 2% to 5% of the total amount of the loan. So, make sure your monthly savings justify the steep upfront costs.
  • Expect a wait. Lenders are inundated, and they’re giving priority to purchase mortgages, so expect to wait about 60 days for a refi to be processed and closed.

Learn more:

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
How to Avoid Being Surprised by 7 Nasty Expenses
How to Avoid Being Surprised by 7 Nasty Expenses

Major expenses are difficult to predict, but there are ways to make sure you’re protected.

5 Memberships That Offer Car Insurance Discounts
5 Memberships That Offer Car Insurance Discounts

These discounts may save you hundreds — even thousands — of dollars a year.

16 Affordable Products That Could Save Your Life
16 Affordable Products That Could Save Your Life

You’ll want to order these sometimes surprising products from Amazon ASAP.

The 3 Biggest Regrets of Retirees — and How to Avoid Them
The 3 Biggest Regrets of Retirees — and How to Avoid Them

Rescuing a retirement from regret starts with these steps well before it’s time to quit working.

10 Places Where Social Security Offers the Best Standard of Living
10 Places Where Social Security Offers the Best Standard of Living

These U.S. counties offer retirees a chance to stretch their benefit checks while enjoying their golden years.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
10 Things Frugal People Never Buy
10 Things Frugal People Never Buy

If you’re a true tightwad, the mere thought of spending money on these items gives you the willies.

10 Useless Purchases You Need to Stop Making
10 Useless Purchases You Need to Stop Making

You might as well flush your money down the loo if you spend it on these things.

7 Social Security Rules Everyone Should Know by Now
7 Social Security Rules Everyone Should Know by Now

Confusion over Social Security is a shame, considering how many of us will need this money badly.

9 Shopping Mistakes to Avoid at Costco
9 Shopping Mistakes to Avoid at Costco

Are you missing out on serious savings at your favorite warehouse club?

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

They don’t make coffee makers like this anymore.

The 16 Cars Most Likely to Last 200,000 Miles
The 16 Cars Most Likely to Last 200,000 Miles

One automaker takes half the spots on a list of the longest-lasting vehicles.

14 Things You Should Stop Buying in 2021
14 Things You Should Stop Buying in 2021

These convenient household products come with hidden costs that you might not have considered.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

Is Writing a Check Still Safe?
Is Writing a Check Still Safe?

Every time you pay by check, you hand your bank account numbers to a stranger.

6 Ways to Protect Your Retirement Accounts From Hackers
6 Ways to Protect Your Retirement Accounts From Hackers

Imagine having $245,000 stolen from your retirement account — and not being reimbursed.

8 Things You Should Replace to Improve Your Life Today
8 Things You Should Replace to Improve Your Life Today

Being frugal isn’t smart if you put off replacing these items.

This Is the Most Dependable Car Brand in the U.S.
This Is the Most Dependable Car Brand in the U.S.

This brand’s vehicles are least likely to give drivers repair headaches, according to J.D. Power.

9 Deep Discounts Available on Amazon This Friday
9 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

7 Social Security Benefits You May Be Overlooking
7 Social Security Benefits You May Be Overlooking

There’s more to Social Security than retirement benefits.

13 Amazon Purchases We Are Loving Right Now
13 Amazon Purchases We Are Loving Right Now

These practical products make everyday life a little easier.

7 Hidden Sections of Amazon Every Shopper Should Know
7 Hidden Sections of Amazon Every Shopper Should Know

These little-known departments of Amazon are gold mines for deal-seekers and impulse shoppers alike.

The 6 Best Investing Apps for Beginners
The 6 Best Investing Apps for Beginners

If you’re looking to ease into investing in the coronavirus economy with just a little money, check out these easy-to-use tools.

7 Income Tax Breaks That Retirees Often Overlook
7 Income Tax Breaks That Retirees Often Overlook

Did you realize all these tax credits and deductions exist — or that they apply to retirees?

7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.