Why the Mortgage Refinance Window Could End Soon

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
15 Free Streaming Services to Watch While Stuck at Home

These free movie streaming sites offer thousands of movies and TV shows, including recent releases and beloved classics. If you love free movies, online sites are where you need to look for the best list of features that are just one easy click away.

Have You Heard of This Best Place to Retire in 2020?

The best place to retire in America is one you likely are not familiar with.

9 Genius Storage Solutions for Your Home

These creative products on Amazon will hide unsightly clutter while saving space.

8 Products That Make It Easier to Get Fit

Amazon reviewers give high marks to these tools that can help you get in shape without a gym.

13 Brilliant Bulk-Buy Items on Amazon

Every household should have these products on hand. Buying them in bulk on Amazon saves you cash.

View this page without ads

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

Get Started

Most Popular
9 Mistakes Everyone Makes When Shopping on Amazon

Are you losing money due to any of these missteps?

7 Changes Coming to Social Security and Medicare in 2021

Recently, both Social Security and Medicare made some major announcements about benefits for 2021.

Can a Divorced Widow Claim Her First Husband’s Social Security Benefits?

The rules are complicated when it comes to eligibility for survivors benefits.

Can a Twice-Divorced Woman Claim Social Security Survivors Benefits?

Understanding survivors benefits rules is the key to getting the most from your benefit.

These Are the 10 Worst Cars for Depreciation

Two types of vehicles are especially likely to see steep plunges in value.

10 Things I Always Buy at Trader Joe’s

From snacks to sweets to side dishes, stock your cart with these time-tested favorites on your next TJ’s run.

9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

5 Ways Social Security Will Change in 2021

These adjustments will affect both workers and retirees in the new year.

8 Things You Should Buy at Restaurant Supply Stores

You don’t have to be a chef or a restaurant owner to shop here.

3 Ways to Get Microsoft Office for Free

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

19 High-Paying Jobs You Can Get With a 2-Year Degree

There are easy high-paying majors available in the U.S. — and no bachelor’s degree is required. We’re here to help you find easy degrees that pay well.

Stop Buying These 19 Things Online

The internet has changed how we shop. But for some things, you’re still better off buying the old-fashioned way.

Cut These 11 Expenses Now If You Hope to Retire Early

Like the idea of financial independence? Part of the FIRE equation is cutting costs.

27 Things You Should Never Pay For — and How to Get Them for Free

When you know the tricks, you can save big on all kinds of useful things that others pay for.

4 Tax Credits That Will Be More Generous in 2021

If you are eligible for these tax breaks, they will slash your federal income tax bill — dollar for dollar.

15 Things You Can Get for Free in December

December is here, which means it’s your last chance to take advantage of fabulous freebies in 2020.

7 Tips for Building an Emergency Food Supply

A pandemic or natural disaster could leave you reliant on your existing emergency food supply. Is your pantry well-prepared for emergencies? Knowing what to stock up on for emergencies can be a difficult task and we’re here to help.

7 Reasons to Carry Mortgage Debt Into Retirement

It often makes financial sense to not pay off your mortgage before retiring.

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.