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Mortgage Interest Rates Forecast For 2021

Erin Gobler6-minute read

November 19, 2021

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The past year and a half has been a record-breaking time for interest rates. When COVID-19 hit, the Federal Reserve slashed interest rates to help stimulate the economy. Throughout 2020, mortgage interest rates hit their lowest levels ever and remained low throughout the year with some fluctuation, according to the Freddie Mac primary mortgage market survey. In the first part of 2021, rates have increased somewhat, but have maintained a low range .

As we move further into 2021, many prospective home buyers are likely asking themselves what rates will look like through the rest of the year. Should you buy sooner rather than later, or will the low rates persist?

In this article, we’re sharing expert predictions on what will happen with mortgage rates throughout 2021 and what home buyers can do with that information.

Mortgage Rate Forecasting Explained

The constant mortgage rate fluctuations over the last few months may have left even the most informed consumers scratching their heads. They may also have you wondering what exactly goes into predicting future rates.

There are a few key factors that experts use in mortgage rate forecasting:

  • Federal Reserve policy: The Fed doesn’t directly set interest rates, but it sets short-term rates, which can influence long-term rates.
  • Economic growth: As the economy improves, interest rates tend to rise, and vice versa. Indicators of economic growth include employment numbers and gross domestic product (GDP).
  • Inflation: Inflation refers to the increase in the price of goods and services. As inflation rises, so do interest rates so that lenders can ensure a profit on their loans.
  • Bond rates: Mortgage rates and bond rates are interconnected. First, mortgages are repackaged and sold as bonds, and so mortgage rates have to be high enough to make those bonds an attractive investment. Additionally, mortgage lenders often use the 10-year Treasury bond as a benchmark for mortgage rates.

Using the information listed above, historic mortgage rates, and other economic factors, financial experts can make mortgage interest rate forecasts.

Each quarter, Freddie Mac publishes a quarterly report with its mortgage rate predictions. Using the economic outlook at past and current rates, Freddie Mac’s Economic & Housing Research Group forecasts what we can expect from rates in the coming months.

It’s important to note these forecasts aren’t a guarantee. Mortgage rates have taken some unexpected turns over the past year and a half, and the experts have certainly been wrong before. But these predictions give home buyers a starting point for planning out their home purchases.

2021 Mortgage Interest Rate Forecast

Mortgage rates have fluctuated consistently over the past year. The rate on a 30-year fixed-rate mortgage dipped as low as 2.65% in January 2021 and reached a high of 3.18% on April 1.

So, what can we expect over the next year?

“As long as the economic expectations of a strong rebound and an increase in inflation continue to pan out, the risk will be toward the side of higher interest rates rather than lower rates,” says Greg McBride, Chief Financial Analyst at Bankrate.com. “But with a much slower growth pace expected in 2022, that might trigger a pullback at some point in the second half of the year. Either way, expect mortgage rates to remain in the 3% – 3.5% range throughout.”

According to Freddie Mac’s most recent quarterly report, rates are expected to rise slowly but consistently throughout the year. Reaching 3.2% in quarter two, 3.3% in quarter three, and 3.4% in quarter four.

Mortgage rates are largely tied to the economy. And as the economy continues to improve from the pandemic, mortgage rates will rise. First, the American Rescue Plan Act of 2021 helped increase consumer confidence, as well as the amount of money that families had in the bank.

The early months of 2021 have also seen an increase in the labor market and a decrease in unemployment, helping move the economy in the right direction. And with the most recent CDC updates regarding vaccination numbers and mask guidelines, Americans can see the light at the end of the tunnel for the pandemic.

All of these factors are expected to move the economy — and therefore mortgage rates — in an upward trajectory.

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June Predictions

While rates are expected to rise throughout 2021 — and experts had been consistently predicting higher rates — that wasn’t necessarily the case in the second quarter of the year.

After hovering well below 3% for the previous 6 months, rates increased sharply throughout the second half of February and the entire month of March, according to data from Freddie Mac. While rates declined throughout April and May, rates remained below 3% the second week of June.

Unfortunately for prospective home buyers, experts don’t expect this trend to last long.

“As the economy and inflation both head up, expect to see modestly higher mortgage rates, though much of this is already reflected as a result of the run-up in rates earlier this year,” says McBride. “The Federal Reserve’s continued bond purchases are also keeping a low ceiling on rates in the meantime.”

It’s impossible to say just how much rates will increase in the coming month, but it may be the month that rates once again rise above 3%.

Long-Term Rate Predictions

It’s also worth discussing interest rate predictions beyond 2021 as families plan out future home purchases. And while it’s impossible to know exactly what will happen in the coming years — and the pandemic is proof of that — experts can certainly make predictions based on past and current events.

“Even though the Federal Reserve is planning to keep interest rates low, having signaled they don’t plan to raise them until 2021, they only control short-term interest rates,” says Karen Condor, a finance expert with USInsuranceAgents.com. “Mortgages are considered long-term interest rates, and mortgage lenders take their cues from the bond market when setting the rates they charge borrowers. Mortgage rates are also tied to the health of the economy. Since the economy, on the whole, is improving as the dramatic repercussions of the coronavirus recede, it’s expected mortgage rates will rise, but not sharply.”

According to Freddie Mac’s market outlook, mortgage rates are expected to continue to rise throughout 2021, with an expected rate increase of about 0.1% per quarter. We can expect to begin 2022 with rates on a 30-year fixed around 3.5% and end the year with rates closer to 3.8%.

So, what does this mean for homeowners?

Yes, higher interest rates mean your mortgage will ultimately be more expensive. But the increase in rates may also reduce demand, according to Freddie Mac. As a result, home buyers may not face the same seller’s market they have throughout the past year.

While this cooling down of the market isn’t expected to reduce housing prices, you may see them grow at a slower rate than they have in late 2020 and the first half of 2021.

What This Means For Borrowers

Now that we’ve discussed likely interest rate trends for the rest of the year, it’s important that we also share what this means for borrowers and what you can do with this information.

First, if you’ve thought about refinancing your mortgage, consider doing so sooner rather than later. If experts are correct and mortgage rates rise in June, and throughout the next year, then there isn’t likely to be a cheaper time to refinance.

Next, if you’ve been planning to buy a home and have your finances in order, it may also be worth buying soon, before rates have a chance to increase. By purchasing a home today rather than six months from now, you could potentially be saving yourself tens of thousands of dollars in interest.

But what if you’re not quite ready to buy yet?

It can be easy to feel that you’re missing out by not buying while rates are low. And yes, waiting to buy might mean a higher interest rate. But ultimately, it’s better to wait until you’re financially ready for a mortgage than to lock in a low interest rate before you’re really ready.

And remember, the current market rate isn’t the only thing that affects your mortgage rate. Your creditworthiness, debt-to-income ratio, and down payment will all factor into the rate you’re able to get.

The Bottom Line: Mortgage Rates Are Likely to Rise

COVID-19 has had a considerable impact on the U.S. economy, and mortgage rates are no exception. Over the past 18 months, rates have remained low, reaching their lowest historical levels. But as the economy recovers from the pandemic, interest rates are expected to follow suit.

Experts generally agree that mortgage interest rates are likely to rise, both over the upcoming month and over the rest of the year. Freddie Mac’s data indicates that rates could rise as much as half a percent before the year ends.

If you’ve been considering buying a home or refinancing a mortgage, now is a great time to do it and lock in today’s low mortgage rates. You can apply today or give us a call at (833) 326-6018.

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Erin Gobler

The Rocket Mortgage Learning Center is dedicated to bringing you articles on home buying, loan types, mortgage basics and refinancing. We also offer calculators to determine home affordability, home equity, monthly mortgage payments and the benefit of refinancing. No matter where you are in the home buying and financing process, Rocket Mortgage has the articles and resources you can rely on.