Mortgage rates climbed for the fifth week in a row, dampening the purchasing power of home buyers and further winnowing the pool of candidates who can benefit from refinancing into a lower rate.
The average interest rate on a 30-year fixed-rate mortgage moved up to 3.09%, according to Freddie Mac. That’s the highest rate since last June. The 15-year fixed-rate mortgage went up to 2.4%.
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“As expected, mortgage rates continued to inch up but are still hovering around 3%, keeping interested buyers in the market,” said Sam Khater, Freddie Mac’s chief economist.
For most prospective buyers, the low inventory of available homes for sale continues to be the biggest challenge.
Rates are also expected to inch higher throughout the year as the economic outlook brightens and the Federal Reserve remains committed to staying on the current track, said George Ratiu, senior economist for Realtor.com.
“Economic signs are pointing toward a post-pandemic return to normality, a welcome development as spring approaches,” Ratiu said. “While we expect rates to remain favorable, especially in light of historical trends, the upward move is capping many buyers’ budgets and trimming their ability to qualify for more expensive homes.”
This could create more competition in popular price ranges, like those sought by first-time home buyers.“But those homes may be slow to arrive, as most sellers are also looking to purchase their next homes and remain wary of market conditions,” said Ratiu.
Refinances tumble
With interest rates regularly hitting new record lows, 2020 was a banner year for mortgages overall and refinances in particular.
A record-breaking $4.3 trillion in mortgages were originated in 2020, of which $2.8 trillion were refinances, which was also an all-time high, according to Black Knight, a mortgage data company.
But each time rates move higher, refinancing makes sense for fewer homeowners.
Refinance activity last week fell 26% from its recent high in January and is now at the lowest level since September 2020, according to the Mortgage Bankers Association. “Last week refinance activity fell across all loan types,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting.
As recently as early February there were some 18 million homeowners for whom a refinance would make sense, according to Black Knight. These are homeowners who are current on their mortgage with credit scores of 720 and above who have at least 20% equity in their home and who could reduce their interest rate by 0.75% or more by refinancing into a 30-year fixed-rate mortgage at the prevailing interest rate.
But those numbers have since fallen off quickly.
By the beginning of March, when rates had topped 3% again, the pool had dropped to 12.9 million refinance candidates, which was the smallest that group had been since May of last year and marked a nearly 30% reduction in just three weeks.
Could you still benefit from refinancing?
As a rule of thumb, refinancing makes sense if you can shave a full percentage point off your current rate. But there are other factors to consider – including closing costs, your loan term and how long you plan to stay in your home – that might make even a half a point drop from your current rate make sense.
“Mortgage rates are climbing faster than many homeowners would prefer, but refinancing can still be a winning proposition,” said Ziggy Jonsson, head of financial products at the online lender Better.com. “Today’s mortgage rates are still historically low.”
Lower payments may still be possible for millions of homeowners, he said.
“Our general advice is to not try to time the market,” said Jonsson. “The cost of waiting to see if rates go lower, could backfire, not making it worth the risk. If the numbers make sense, seize the opportunity.”
