With mortgage rates at or near new lows, 15M are in the refinance sweet spot

Clayton Jarvis

Sun, Aug 8, 2021, 10:20 AM 5 min read

Here’s an uncomfortable truth about COVID-19’s delta variant: It’s a catastrophe for the nation and the world, but it has been something more positive for homeowners looking to refinance their mortgages.

As COVID cases surged in the U.S. last week, the resulting economic uncertainty pushed 30-year mortgage rates even deeper below 3% and closer to their all-time low, according to a long-running weekly survey.

A separate study says the plunge in rates means millions of homeowners are now prime refinance candidates who could save about $300 a month by trading in their mortgages for cheaper new ones.

30-year mortgage rates

Keychain — Robert Kneschker/Shutterstock

The interest rate on a 30-year fixed-rate mortgage averaged 2.77% last week, mortgage giant Freddie Mac reported on Thursday. That’s the lowest since early February — and not far from the all-time low of 2.65% reached in the first week of January.

"With global market uncertainty surrounding the delta variant of COVID-19, we saw 10-year Treasury yields drift lower and consequently mortgage rates followed suit," says Sam Khater, Freddie Mac's chief economist. "This bodes well for those still looking to refinance, renovate or even purchase a new home.”

At this time a year ago, the 30-year fixed-rate loans carried an average rate of 2.88%.

Rates have fallen so far that the mortgage technology and data firm Black Knight reported last week that 15.1 million current mortgage holders are good refinance candidates who could save an average $298 a month by refinancing their homes.

15-year mortgage rates

Mortgage costs — karen roach/Shutterstock

Here’s where things get extra appealing for homeowners.

The average rate on a 15-year fixed-rate mortgage, a popular choice for refinances, spent a second consecutive week at its lowest level in history: just 2.10% last week. A year ago, the shorter-term loans averaged a significantly higher 2.44%.

Because the term is shorter, your payments with a 15-year mortgage will be significantly higher than with a 30-year.

But the 15-year fixed has two distinct advantages over 30-year products when it comes to refinances: a shorter loan term and generally lower rates. With a 15-year, you'll pay far less in interest and own your home sooner.

5/1 adjustable mortgage rates

Rates rising or falling — ilikeyellow/Shutterstock

The rate on 5/1 adjustable rate mortgages, or ARMs, declined last week, falling to 2.40% from 2.45% the week before.

Last year at this time, 5/1 ARMs had an average rate of 2.90%.

Adjustable-rate loans can be a bit of a gamble. For the first several years, they have fixed rates that are typically lower than what you’d be charged on a more conventional fixed-rate product, like a 30- or 15-year. But after that, the rate can increase or decrease ("adjust") each year.

A 5/1 ARM would have you paying a fixed interest rate for the first five years of your loan. Your rate will adjust every (one) year after that.

Rates forecast to go higher

A street view of a new construction neighborhood with larger landscaped homes and houses with yards and sidewalks taken near sunset with copy space — Ursula Page / Shutterstock

A few months ago, few people might have predicted that mortgage rates would slide back toward record low territory. Now, it's hard to say how they'll move from here, says Danielle Hale, chief economist at Realtor.com.

"Eventually, we expect rates to begin to climb, but the timing of this increase is dependent on how the latest health threat evolves and its impact on the Fed's monetary stance," Hale says.

The Federal Reserve expects it will need to keep up its pandemic-fighting policies, which have included holding a key interest rate near zero and buying tens of billions of dollars' worth of Treasury bonds and mortgage-backed securities each month. Those tactics have helped keep mortgage rates low.

But some of the lending industry’s heaviest hitters anticipate that rates will rise in the next few months.

Freddie Mac recently predicted that 30-year fixed-rate mortgages will average 3.1% by late 2021 — then grow more expensive in each quarter of 2022, on the way to hitting an average 3.8% by the end of next year.

The Mortgage Bankers Association’s most recent forecast sees the 30-year fixed rate averaging 3.4% this year. That suggests much higher rates are coming, given how low rates have been for the first eight months of 2021. In 2022, the MBA expects the 30-year to climb to an average 4.3%.

How to nail down a lower rate

A satisfied housewife types an email message to the bank on her laptop. Applies for a mortgage loan online at the bank. The woman is a young red-haired European-looking student. — muse studio / Shutterstock

The lesson: If low mortgage rates are the determining factor in your decision to buy a home or refinance your mortgage, today’s rates might be as good as they’re going to get.

Mortgage rates are undeniably attractive right now, but a lender won't necessarily offer you the lowest rate possible. Getting the best rate will require a little work on your part.

You'll need to:

Work on your credit score. The best mortgage rates tend to be offered to borrowers with the most impressive credit histories. Today you can easily take a free look at your credit score, to see if you need to improve it before you start contacting lenders.
Wipe out debt and free up your finances. Carrying multiple high-interest debts, like credit card balances, won’t give lenders confidence that you’ll be able to pay them back each month. Consider rolling your balances into a single, lower-interest debt consolidation loan, so you’ll pay less interest, get out from under your other debts sooner and improve your cash flow.
Shop around. When you’re ready to approach lenders, don't jump at the first one claiming to offer "the lowest rates around." They all say that. Compare mortgage offers from at least five lenders to find the best rate available in your area and for a borrower with your unique credit profile.