Why are mortgage rates going up? And how high will they go?

Casey Morris
The Mortgage Reports contributor

Are mortgage rates going up?

Mortgage rates have been on an upward trend in 2021.

January started off with a record-low 30-year mortgage rate of 2.65%. But by March 4, rates spiked above 3% for the first time in 7 months.

The question now is, will interest rates keep going up? And by how much?

Experts still predict rates will hover around the low-3s for the rest of the year.

But for those hoping to score a record-low rate, the window could be closing soon. If you’re ready to buy or refinance, now might be the time to lock.

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Mortgage rate trend chart

You can see how current mortgage rates are moving in the chart below, based on Freddie Mac’s weekly average rates for 30-year fixed-rate mortgages (light blue) and 15-year fixed-rate mortgages (dark blue).

Data: Freddie Mac
30 Year Conventional
15 Year Conventional

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Why are interest rates going up?

Interest rates are going up because the economy is starting to have a more positive outlook on post-COVID recovery.

Coronavirus has been the major force keeping mortgage rates low over the past year. The closer we get to widespread vaccination — and the better our economic outlook as a result — the higher rates will go.

Although the U.S. is still at a critical stage with the virus, we’re finally starting to see a path forward with the widespread rollout of vaccines and the passage of a $1.9 trillion relief bill championed by the Biden Administration.

The coronavirus relief bill and interest rates

The aim of the new coronavirus relief bill — dubbed the ‘American Rescue Plan’ — is to ease the country’s economic burden and spur spending and growth.

Economic growth would likely raise mortgage rates as different sectors rebound.

A stronger economy means investors are willing to take bigger risks with their investments. This moves money out of ‘safe’ mortgage-backed securities and into different financial vehicles — thus pushing mortgage rates up. 

Mortgage Professional America Magazine also reported that stimulus spending could increase inflation, which would drive up mortgage rates as well. 

Keeping an eye on the 10-Year Treasury bond yields

Eli Sklar, senior loan consultant with loanDepot, pointed to the 10-Year Treasury yield as an indicator of an improving economy and a signal that rates will rise in the coming year. 

“The Ten-Year Treasury’s price, which is a big indicator of mortgage rates, is inversely related to how the market is doing. As the market continues to do well, the Ten-Year Treasury’s value goes down because the Ten-Year Treasury is known as the safest investment,” Sklar said. 

A spike in investor interest in the 10-Year Treasury as the economy cratered last year, combined with the Federal Reserve’s commitment to keep interest rates low, drove down 10-Year Treasury yields and mortgage rates.

But, Sklar said, as the economy recovers and people regain confidence in other types of investments, the 10-Year Treasury will decline and mortgage rates will rise once again. 

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How high will mortgage rates go in 2021?

“Since reaching a low point in January, mortgage rates have risen by more than 30 basis points,” Said Freddie Mac’s weekly rate survey on March 4.

30 basis points is equal to 0.30% — a difference of about $55 per month on a $350,000 mortgage.

Interest rates could continue to rise this year, particularly if the Biden Administration is able to make good on its promise of supplying enough vaccines for every U.S. adult by May.

However, major housing agencies are still predicting only a modest rise, putting 30-year fixed-rate mortgages in the high 2% or low 3% range on average.

Though rates in the mid-3s would cost borrowers significantly more than the 2% rates we’ve been seeing until now, they’re still far below the historic average rate of around 8%.

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%

As long as the pandemic forces the closure or reduced hours of businesses and strains the economy, it’s unlikely that mortgage rates will rise substantially. 

Even with widespread vaccine access, a recovery for individuals who suffered job losses or reduced hours, not to mention hard-hit small businesses, won’t happen overnight. 

“I do think it’s going to get better, but I think it’s worse than people think,” said Jarred Kessler, CEO of EasyKnock, a company that allows people to tap the equity in their homes through a sale-leaseback program.

Kessler says a slow but steady recovery as the service industry resurges and businesses and individuals get back on their feet “will be correlated with [rising] interest rates.”

As long as COVID stresses the economy, it’s unlikely mortgage rates will rise substantially.

“I think we’re going to stay in a low interest rate environment for definitely the next two years,” Kessler said. 

Once the economy does begin to recover more consistently, however, increased yields on Treasury and other bonds will nudge interest rates higher as well, MarketWatch reports

Rates could also rise if the federal government stops, or at least eases, its pandemic policy of buying unlimited mortgage-backed securities.

If the economy begins steadily improving, the Federal Reserve may begin tapering those purchases, which could impact rates. However, Kessler said a formal announcement about a policy change seems unlikely in the immediate future. 

“It’s a Catch-22. If you do it, rates are going to go up and the Fed might be forced to backtrack a little bit,” Kessler said. “I think things are too fragile right now.” 

The bottom line is that although rates may rise somewhat in the coming months, the Federal Reserve projects that they will stay at historically low numbers through at least 2023. 

COVID vaccines will set the tone for mortgage interest rates

Although the two might seem unrelated, the progress of COVID vaccinations is one of the biggest drivers behind mortgage rates right now.

In theory, as more people get the vaccine and are able to safely eat at restaurants, travel, and attend large events, the economy will regain some of the momentum lost during the pandemic. 

However, a full recovery will take time, particularly if many opt not to get the vaccine due to fear of side effects.

The Pew Research Center found that as of December, 60% of Americans surveyed said they would likely take the vaccine once it became available to them. But 21% expressed misgivings about the vaccine and said they would probably not get it, even once more information became available about it. 

Although the percentage of people who need to be vaccinated in order to achieve herd immunity to COVID-19 is not yet known, according to the World Health Organization, it typically must be significantly higher than 60%. So it will take a lot of doses — and willing participants — to get the economy back on track.

Remember that a weak economy means low mortgage rates, because investors pour money into the safe haven of mortgage-backed securities (MBS). This pushes rates down.

As the economy improves, which will gradually happen with widespread vaccination, investors will turn elsewhere and mortgage rates will once again increase.

Should I try to buy a house while rates are low? 

Buying real estate is something you should decide based on your finances rather than what’s happening in the market.

As Kessler puts it, “I think you’re nuts if you’re trying to time it” for when mortgage rates are at record lows.  

“You’re in an unprecedented period of time where you can borrow for pretty much nothing right now. If you want to buy a home, don’t buy a home for a one-year trade. You should be thinking five, 10 years out,” he said.

Home buyers should consider their credit score, savings, and the local housing market, and make a decision based on those factors rather than relatively small interest rate changes. 

Even if you wait to buy a home until your finances improve, you’re still looking at historically low mortgage rates.

Even if you wait to buy until you’re in a better financial position and rates increase by then, you’re still looking at historic lows, Sklar said.

The important thing is to make sure you can afford monthly payments on the home you want, and to take a long-term view of what you’re paying. 

Sklar also said buyers should keep in mind that purchasing in a lower interest rate environment isn’t the only way to save on interest. You can also buy down your rate by paying discount points when you close on the home to reduce the amount of interest you’ll pay. 

Establishing good credit, keeping non-mortgage debts low, and saving up for a larger down payment can also help you qualify for a competitive rate.

Verify your home buying eligibility (Jul 29th, 2021)

Should I lock a refinance rate?

Sklar said he advises homeowners against trying to “time” the market or waiting to lock in a rate in the hopes that it might go a little bit lower. 

“Do I expect it to go to zero? It’s not going to happen,” he said. “So if you don’t lock it, maybe you’ll lose a little bit from it going down. But there’s so much more to lose because if the rates go to simply 3%, you’ve just lost a tremendous amount of money.” 

Don’t worry if you’re not at the rate-lock stage yet. The low-rate window for refinancing isn’t over.

Mortgage rates are still near record lows and expected to stay there for the rest of 2021. If your current interest rate is in the 4-5% range or higher, you stand to save a lot even as rates are ticking up slightly.

Instead of focusing on timing the market, focus on how a mortgage refinance could benefit you.

“I think people are getting too fixed on the interest rate,” Sklar said. “I think people have to look at their actual savings.” 

Someone who wants to refinance, for instance, needs to calculate exactly how much they’ll save by applying for a new loan. If you’re only trimming your monthly mortgage payments by a small amount each month, it may not be worth the time and closing costs to take out a new loan. 

Or maybe saving month-to-month isn’t your priority. If you want to cash-out home equity or pay off your mortgage early, timing the market for a rock-bottom rate might not be quite as important.

Whether you’re refinancing or home buying, the right timing always depends on your unique situation.

Rates should stay low for the rest of the year at least, so lock when you’re ready and it makes sense for you to do so.

If you’re ready to lock, don’t wait

If you are at a stage where you’re ready to lock a mortgage rate, we don’t recommend waiting for rates to fall back down to all-time lows.

Yes, rates can tick up and down on a daily basis. So there’s a chance you could get a marginally better deal. But at this point, the risk of waiting and seeing rates go up seems more likely than seeing them go down a meaningful amount.

If you qualify for today’s low mortgage rates, you can feel secure in the knowledge that you’re getting a better deal on your home loan than most buyers in history.

Just make sure you compare rates from a few lenders so you know you’re getting the best deal available to you.

Verify your new rate (Jul 29th, 2021)