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This week, the Treasury bond market rose to levels we haven’t seen since March 2020 — and economists expect an increase in mortgage rates could be on the horizon.
“As long-term Treasury yields start to rise, then that’s going to put upward pressure on fixed-rate mortgage rates,” says Frank Nothaft, chief economist with the real estate data firm Corelogic.
Over the past month, Treasury yields had strong growth, which continued this past week with 10-year and 30-year Treasuries nearly reaching pre-pandemic levels. The increased likelihood of more government spending, which experts predict will give a much needed boost to the economy, is one factor that will play a role.
“The support that we’re expecting to get from the current administration … that’s going to provide assistance for a lot of households who are in financial distress,” says Mortgage Bankers Association economist Joel Kan. “It’s going to help growth — and any kind of growth that we’re going to get will put upward pressure on rates.”
Late last week, the Biden administration’s $1.9 trillion stimulus package cleared a hurdle to approval with both the House of Representatives and Senate approving budget resolutions. This allows the Democratic-led Senate to approve the measure with a simple majority.
Optimism is high, with Treasury Secretary Janet Yellen saying she expects the U.S. to return to full employment by next year if the stimulus package is passed.
“That’s good news. It also probably adds a little bit to inflation,” Nothaft says. Inflation is one of the main factors that influences long-term Treasury bond yields and mortgage rates, which tend to move in tandem. “[The change in mortgage rates] doesn’t all happen overnight, it’s a gradual process as we get more information over time.”
Here’s how all of this could impact your future plans to take out a mortgage or refinance an existing home loan.
Mortgage Rates Are Expected to Rise — and Put a Damper on Your Refinancing Plans
Mortgage rates bottomed out at the end of last year, and have inched upward since then. Many expect to see mortgage rates continue to rise this year.
“Our forecast [has mortgage rates] going up to around 3.4% by the end of the fourth quarter of 2021,” says Mortgage Bankers Association economist Joel Kan. “The reason why we have an increasing rate path is driven by the expectations of stronger growth in the second half of the year.”
The current economic uncertainty has kept mortgage rates from skyrocketing. The latest Bureau of Labor Statistics jobs report showed a slight decrease in the unemployment rate, to 6.3% in January. Underlying that number is the reality that over 10 million people remain unemployed.
Mortgage rates rising will likely have a bigger impact on your plans to refinance than it will on whether or not you can afford to purchase a home. There are other factors that heavily influence the homebuying process, such as the seller’s market that we’re in.
“Historically, rates have never been the deal breaker,” Kan says. “When it comes to such a big decision [home buyers] are going to adjust in other places to make sure the monthly payment is manageable.”
Where rising rates will have the biggest impact is in homeowners’ decisions on whether or not it’s the right time to refinance. “Refinancing really is driven by rates, primarily,” Kan says. This past year’s record low mortgage rates created a massive surge in mortgage refinancing, which has slowed a bit, but still is up 46% year over year.
It may not take much rate movement to put a damper on your refinancing plans. “Even going up by half a percentage point could prove to be a pretty big hit to the refinance market,” Kan says.
Treasury rates have been increasing steadily since August 2020, and mortgage rates are starting to feel the pressure. Barring an unexpected set back to our economic recovery, experts predict rates will rise by the end of 2021. So if you’ve been considering refinancing, you still have time to lock in a better rate. Just make sure you’re not paying excessive fees and that refinancing aligns with your other financial goals and life plans.