Will mortgage rates go down in February 2021? Forecast and trends

Tim Lucas
The Mortgage Reports editor

Mortgage rates forecast for February 2021

Mortgage rates’ best days may be behind them.

According to Freddie Mac, rates jumped faster than any time since March 2020 in response to election developments.

Are low rates gone forever? By no means. The 30-year mortgage rate average is still just 2.79%, says Freddie Mac, about where they were in November.

But recent increases should be a wakeup call. Low rates don’t last, and can be gone before rate shoppers can lock.

Find and lock a low rate today. (Jan 16th, 2021)

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Mortgage rates next 90 days

This chart shows past mortgage rate trends, plus predictions for the next 90 days based on current events and 2021 forecasts from major housing authorities.

Mortgage rates are set to rise after presidential and congressional elections. Mortgage forecast for 2021 is for higher rates.
Lock in today's rates before they rise. (Jan 16th, 2021)

Predictions for February 2021

Here are trends we see on the horizon in the upcoming month and year.

Democrat-controlled Congress puts upward pressure on rates

The Georgia senate runoff election determined who would control Congress, hence the nationwide interest.

Democrats won both seats, making the Senate a 50-50 split between Republicans and Democrats. But Vice President-elect Kamala Harris will be the tie breaker, essentially giving Democrats a 51-50 majority.

This is a big deal for mortgage rates because investors predict a Democrat-controlled Congress will pass stimulus and other spending measures more easily. This is bad for rates for two reasons.

First, stimulus efforts and other government programs tend to lift the economy. Consumers spend more and businesses hire more. A hotter economy can lead to inflation, which is bad for mortgage rates. Plus, the Fed may end the rate-reducing programs it launched post-COVID if the economy recovers faster than expected.

Second, bigger government spending means larger bond issuance. The government issues bonds (debt) to pay for programs.

Mortgage rates are tied to bond prices. So if the government floods the market with bonds, bond prices go down due to supply and demand. Interest rates must rise to keep investors buying those bonds. This drives up interest rates on mortgages, too, since mortgage rates are tied to certain bond rates.

If that explanation was a bit too much, just remember that more government spending leads to higher mortgage rates.

And rates are already starting to spike, even before any legislation is introduced.

If you’d like to take advantage of sub-3% rates while they are still around, you might want to act fast.

    Related

The Fed could end rate-suppressing programs sooner than expected

Mortgage rates are in the high-2s largely because the Fed is artificially keeping them low.

The group purchases $120 billion in bonds per month, $40 billion of which are for mortgage-backed securities, the bonds that determine mortgage rates.

The December Fed meeting minutes revealed that a few members are already thinking about how to pare back these purchases once the economy recovers. The group would follow the path it took in 2013 to lower asset purchases after the housing meltdown.

That’s not good news, though. The year 2013 was one of the worst years on record for rate increases. The 30-year rate went from 3.35% on May 2 to 4.46% on June 27 according to Freddie Mac. That’s an increase of almost $200 per month on a $300,000 mortgage — in 8 weeks.

In 2013, rates rose so fast that the payment on a $300,000 mortgage increased by $200 per month in 8 weeks.

Markets are always forward looking. If the Fed tips their hand about tapering stimulus, the market could react violently and rates could skyrocket.

Keep in mind that, in 2012 and 2013, rates kept hitting all-time lows before jumping skyward. And that’s pretty much the story of mortgage rates through 2020. Are we due for a huge jump? Maybe.

Lock in today's rates. Start here. (Jan 16th, 2021)

The Fed to keep its benchmark rate low until 2023

The Federal Reserve has a few levers with which to keep rates low in the economy.

Discussed above is bond purchases which have the biggest impact on mortgage rates.

But an indirect method of rate suppression is to keep its benchmark rate — the federal funds rate — near zero.

This rate level allows banks to borrow money at nearly no cost — which has a trickle-down effect on consumer borrowing and interest rates in general.

The Fed’s current rate-friendly stance is a boon for mortgage shoppers.

Federal Reserve forecast pre- and post-COVID. The Fed is predicting zero rate increases until at least 2023.

What does this mean for the personal finances of the average American consumer?

It means you’ll likely have access to ultra-low rates for years. Perhaps not as low as they are now, but very low from a historical standpoint.

If you’re ready, it’s a fantastic time to lock in.

Housing agencies nationwide are calling for rates in the high 2s and low 3s for 2021.

Agency 30-Yr Rate Prediction
Fannie Mae 2.80%
Wells Fargo 2.89%
Freddie Mac 3.00%
National Assoc. of Home Builders 3.00%
National Assoc. of Realtors 3.20%
Mortgage Bankers Assoc. 3.30%
Average of all agencies 3.03%
Mortgage rate predictions from major housing authorities 2021. Average of all forecasts is 3.03% 30-year fixed.

To sum it up, rate predictions vary widely. Today’s rate might be as good as we’ll see for years to come, or they might improve.

Mortgage strategies for February 2021

Take advantage of new higher loan limits

Conventional and FHA loan limits are on the rise again.

Each year, government agencies analyze price increases across the country to determine loan amount caps for its conventional and FHA loans. Here are the numbers for 2021:

Conventional

  • 1-unit homes: $548,250
  • 2-unit homes: $702,000
  • 3-unit homes: $848,500
  • 4-unit homes: $1,054,500

FHA

  • 1-unit homes: $356,362
  • 2-unit homes: $456,275
  • 3-unit homes: $551,500
  • 4-unit homes: $685,400

These are limits in low- to average-cost areas. High-cost areas get higher limits, all the way up to $822,375 for a 1-unit home.

This is significant for some home buyers because it means they can avoid the stricter guidelines that come with jumbo loans.

Say a home buyer is purchasing a $1 million home with $180,000 down in Los Angeles. They now qualify for a conforming loan, since $820,000 is within the limits for that area.

This buyer can potentially qualify without meeting lofty expectations of jumbo loans, such as 20% down, 720+ credit, and impeccable job history.

If you thought you were going to need a jumbo loan, run the numbers again with new, higher 2021 loan limits. You might be surprised.

If you’re over loan limits, consider secondary financing

If you still need a jumbo loan, even at the higher 2021 mortgage limits, consider a piggyback loan.

That’s where you add a second mortgage on top of your first mortgage. The second mortgage can help you stay within conforming loan limits.

How? Here’s an example.

  • Purchase price $1 million
  • Local loan limit: $700,000
  • Down payment $200,000

Here are the options in this scenario:

  • Option 1: One jumbo loan at $800,000
  • Option 2: Conforming loan at $700,000 plus a second mortgage for $100,000

You might choose Option 2 if you can’t quite qualify for a jumbo loan due to its higher standards for credit and available assets. Yes, you will have to qualify for the second mortgage, but that might be easier than meeting jumbo loan standards.

The two-loan solution will be a widely-used tool in 2021 as home prices heat up under renewed competition for homes.

2021 will hold the perfect opportunity to get rid of mortgage insurance

Home values skyrocketed in 2020. As we enter 2021, homeowners will enjoy the dual blessing of rising home values and low rates.

This puts them in a fantastic position to refinance out of mortgage insurance.

Most home buyers don’t put down 20%. The average is more like 6%. But that means most first-time home buyers are paying some kind of mortgage insurance.

Mortgage insurance is not bad, but it’s not fun to pay, either.

Luckily, many homeowners now have 20% equity despite putting only 5-10% down not that long ago.

These homeowners can refinance into a conventional loan and get rid of mortgage insurance altogether.

This is true for those with private mortgage insurance (PMI) or FHA mortgage insurance (MIP).

It could save you hundreds of dollars per month.

If your home equity has skyrocketed in the last 12-24 months, it’s worth talking to a lender, who can let you know your chances of refinancing out of your mortgage insurance for good.

Get started on your loan application here. (Jan 16th, 2021)

Loan product rate updates

Many mortgage shoppers don’t realize there are many different types of rates in today’s mortgage market.

But this knowledge can help home buyers and refinancing households find the best value for their situation.

Following are updates for specific loan types and their corresponding rates.

Conventional loan rates

Conventional refinance rates and those for home purchases have trended lower in 2020.

According to loan software company Ellie Mae, the 30-year mortgage rate averaged 2.99% in November (the most recent data available), down from 3.01% in October.

This is higher than Freddie Mac’s 2.79% weekly average because it factors in low credit and low-down-payment conventional loan closings, which tend to come with higher rates.

Plus, it’s a more delayed report, and interest rates have been dropping.

Lower credit score borrowers can use conventional loans, but these loans are more suited for those with decent credit and at least 3 percent down.

Five percent down is preferable due to higher rates that come with lower down payments.

Twenty percent of equity is preferred when refinancing.

With adequate equity in the home, a conventional refinance can pay off any loan type. Got an Alt-A, subprime, or high-PMI loan? A conventional refi can take care of it.

For instance, say you purchased a home three years ago with an FHA loan at 3.5 percent down. Since then, home prices have skyrocketed.

Because of your higher home value, you now have 20 percent equity, which means you could refinance into a conventional loan and eliminate FHA mortgage insurance.

This could be a savings of hundreds of dollars per month, even if your interest rate goes up.

Getting rid of mortgage insurance is a big deal in any mortgage market. This mortgage calculator with PMI estimates your current mortgage insurance cost. Enter a 20 percent down payment to see your new payment without PMI.

Find a low conventional loan rate. Start here. (Jan 16th, 2021)

FHA mortgage rates

FHA is currently the go-to program for home buyers who may not qualify for conventional loans.

The good news is that you will get a similar rate — or even lower — with an FHA mortgage loan than you would with a conventional one.

Related: Read more about FHA costs and requirements on our FHA loan calculator page.

According to loan software company Ellie Mae, which processes more than 3 million loans per year, FHA loan rates averaged 2.99% in November, matching the average conventional rate.

Another interesting stat from Ellie Mae: About 20 percent of all FHA loans are issued to applicants with credit scores below 650.

FHA loans come with mortgage insurance. But the overall cost is not much more than for conventional loans.

A little-known program, called the FHA streamline refinance, lets you convert your current FHA loan into a new one at a lower rate if rates are now lower.

An FHA streamline mortgage application requires no W2s, pay stubs, or tax returns. And you don’t need an appraisal, so home value doesn’t matter.

Find low FHA rates. Start here. (Jan 16th, 2021)

VA mortgage rates

Homeowners with a VA loan currently are eligible for the ever-popular VA streamline refinance.

No income, asset, or appraisal documentation is required.

If you’ve experienced a loss of income or diminished savings, a VA streamline can get you into a lower rate and better financial situation. This is true even when you wouldn’t qualify for a standard refinance.

But don’t overlook the VA loan for home buying. It requires zero down payment.

That means if you have the cash for closing costs, or can get them paid for by the seller, you can buy a home without raising any additional funds.

Don’t overlook the VA loan for home buying. It requires zero down payment.

VA mortgages are offered by local and national lenders, not by the government directly. Most active-duty members or veterans of the United States military can qualify.

This public-private partnership offers consumers the best of both worlds: strong government backing and the convenience and speed of a private company.

Most lenders will accept credit scores down to 620, or even lower. Plus, you don’t pay high interest rates for low scores.

Quite the contrary, VA loans come with the lowest rates of all loan types according to Ellie Mae.

In November, (the most recent data available), 30-year VA mortgage rates averaged just 2.72% while conventional loans averaged 3.01%, representing a big discount if you’re a veteran.

Check your monthly payment with this VA loan calculator.

There’s incredible value in VA loans.

Check today's VA loan rates. Start here. (Jan 16th, 2021)

USDA mortgage rates

Like FHA and VA, current USDA loan holders can refinance via a “streamlined” process.

With the USDA streamline refinance, you don’t need a new appraisal. You don’t even have to qualify using your current income. The lender will only make sure that you are still within USDA income limits.

Home buyers are also learning the benefits of the USDA loan program for home buying.

No down payment is required, and rates are ultra-low.

Home payments can be even lower than rent payments, as this USDA loan calculator shows.

Qualification is easier because the government wants to spur homeownership in rural areas. Home buyers might qualify even if they’ve been turned down for another loan type in the past.

Like FHA and VA loans, the USDA program is for people who want to buy or refinance a primary residence; these loan programs aren’t for real estate developers.

Find a lock low USDA rates. (Jan 16th, 2021)

Mortgage rates today

While tracking monthly mortgage rate forecasts and weekly averages are helpful, it’s important to know that rates change daily.

You might get 3.00% today, and 3.125% tomorrow. Many factors alter the direction of current mortgage rates.

To get a synopsis of what’s happening today, visit our daily rate update. You will find live rates and lock recommendations.

February economic calendar

The next 30 days hold no shortage of market-moving news. In general, news that points to a strengthening economy could mean higher rates, while bad news from economists can make rates drop.

  • Wednesday, January 27: Fed funds rate, FOMC announcement
  • Friday, February 5: Nonfarm Payrolls, wages, unemployment rate
  • Wednesday, February 10: Inflation rate
  • Friday, February 17: NAHB Housing Market Index
  • Thurday, February 18: Housing Starts, Building Permits
  • Friday, February 19: Existing Home Sales
  • Thursday, February 25: Pending Home Sales

Now could be the time to lock in a rate in case these events push up rates this month.

Mortgage rates Q&A

Below are some of the most common questions about mortgage rates.

What are current mortgage rates today?

Mortgage rates fluctuate based on market conditions and your specific situation. For instance, someone with a high credit score will get a lower rate than someone with a low score. 

Will mortgage interest rates go down in 2021?

According to our survey of major housing authorities such as Fannie Mae, Freddie Mac, and the Mortgage Bankers Association, the 30-year fixed rate mortgage will average around 3.03% through 2021. Rates are hovering below this level as of January 2021. 

Can you negotiate a better mortgage rate?

Yes. Lenders have the flexibility to drop their rates and fees. Often, you must approach a lender with a better offer in writing before they will lower their rate.

Is 3.875% a good mortgage rate?

Historically, it’s a fantastic mortgage rate. But, rates are currently hovering lower than this for well-qualified applicants. The average rate since 1971 is more than 8% for a 30-year fixed mortgage. To see if 3.875% is a good rate right now and for you, get 3-4 mortgage quotes and see what other lenders offer. Rates vary greatly based on the market and your profile (credit score, down payment, and more).

Which mortgage company has the best rates?

Most companies have similar rates. However, some offer ultra-low rates to gain market share. Others have lower rates for FHA than conventional, or vice versa. The only way to know if your company is offering the lowest rate is to get quotes from various lenders. 

How much does 1 point lower your interest rate?

A point is a fee equal to 1 percent of your loan amount, or $1,000 for every $100,000 borrowed. Your interest rate could drop a quarter to a half a percentage point or more for each point paid. However, that can vary depending on the lender, loan characteristics, and borrower profile.

How can I avoid paying closing costs?

You can 1) request a lender credit; 2) request a seller credit (if buying a home); 3) increase your mortgage rate to avoid points; 4) get a down payment gift (which can be used for closing costs); 5) get down payment assistance. 

What do 10-year Treasury bond yields have to do with mortgage interest rates?

Treasury yields and mortgage rates are not directly linked, but they are strongly correlated. 10-year Treasury yields and 30-year fixed mortgage interest rates tend to move in lock step with one another. That’s because both products are bought on the secondary market by the same types of investors.

Mortgage rates are higher than Treasury yields because mortgages are inherently more risky. Interest rates for mortgages are based on prices for mortgage-backed securities (MBS). The same factors that drive MBS up or down usually drive Treasuries up or down, hence the common misconception that Treasuries drive mortgage rates.

Why do interest rates decrease during times of economic volatility?

The Fed doesn’t set mortgage rates, but its economic policies influence mortgage markets. In times of economic uncertainty, the Fed promotes lower interest rates to encourage more borrowing which helps stimulate the economy. Lower rates can also raise home values which bolsters many Americans’ net worth.

Can I refinance even if my home is in forbearance?

If you entered into mortgage forbearance because of the coronavirus pandemic, you may be able to qualify for a refinance after exiting your forbearance plan. If you missed payments during forbearance, you’ll have to make three consecutive on-time payments before qualifying for a conventional refinance, according to FHFA’s rules.

What are today’s mortgage rates?

Low mortgage rates are still available. You can get a rate quote within minutes with just a few simple steps to start.

Show Me Today's Rates (Jan 16th, 2021)  

Selected sources:

  • https://www.elliemae.com/mortgage-data/origination-insight-reports
  • https://tradingeconomics.com/united-states/calendar
  • https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm