Despite the economic hardships of 2020, the housing market boomed because of high demand, low supply, and low mortgage interest rates.

If you’re looking to take out a mortgage this year, you need to know whether rates are expected to stay low or if there’s an increase on the horizon. 

Here’s what to expect with mortgage interest rates in 2021 and how this forecast may affect your plans to buy a home.

What Happened to Mortgage Interest Rates in 2020?

Mortgage interest rates were on a steady downtrend for most of 2020. At the start of January, 30-year fixed rates were averaging 3.86%, and by the end of December, they dropped to 2.95%, according to Bankrate. Meanwhile, 15-year fixed rates began around 3.20% in January and closed out near 2.37% in December. For comparison, rates averaged 3.9% in 2019, according to Freddie Mac.

When the pandemic started affecting the economy, the Federal Reserve instituted emergency interest rate cuts. They also increased debt purchases and created new lending facilities. These actions made lending more accessible and homes more affordable, which led to a rise in buyer interest. However, competition and prices remained high because of low inventory.

Low mortgage interest rates were especially appealing to first-time homebuyers in 2020. Renters realized if they were going to spend so much time at home, they needed more space. City dwellers decided they wanted to spread out and looked to the suburbs for an affordable oasis. The dilemma was whether to snap up a low rate or wait for more housing options. 

How Are Mortgage Interest Rates Expected to Change in 2021?

Mortgage interest rates are expected to stay low in 2021, with a slight uptick. Rates will average 3.1% this year, according to the National Association of Realtors. Rates averaging 3.3% in 2021 are predicted by the Mortgage Bankers Association. Though even a small jump can considerably increase monthly payments and the overall cost of a loan, we still expect to see some historically low rates.

There could be some dramatic swings in mortgage interest rates as the year progresses. As more people get COVID-19 vaccinations, the economy is likely to rebound, which will generate inflation concerns. One indicator to watch is the 10-year Treasury rate. If it stays high, that usually means mortgage interest rates will rise as well. However, yields on these bonds spiked several times in 2020, and then lost momentum.

The good news is the Federal Reserve has pledged not to raise interest rates through 2023 to support economic recovery. But it’s important to note our central banking system does not set mortgage interest rates. Rather, the Federal Reserve can indirectly influence mortgage interest rates through monetary policy and moving the federal funds rate.

What Factors Determine My Mortgage Interest Rate?

Mortgage interest rates depend on many factors besides market conditions. For starters, the higher your credit score, the lower rate you’re likely to get. Before you set out to secure a mortgage, you should review your credit report and dispute any errors. This may take some time, but it will be worth it if you can get a higher score.

Your mortgage interest rate may vary depending on where you want to buy a home. The state, county, and neighborhood can all affect a lender’s decision. How much you need to borrow can also make a rate go up or down. If your loan is not an average amount, you could be looking at a higher interest rate. 

Homebuyers can pay higher interest rates on loans that are particularly small or large. 

The size of your down payment will factor into your mortgage interest rate. Typically, the more money you put down, the lower your interest rate will be. If you have a big investment in the property, the lender sees a lower level of risk. A down payment of 20% or more should help get you a good rate. If you choose an adjustable-rate mortgage instead of a fixed-rate mortgage, you may start the loan with a lower interest rate, but that could change over time. The length of your loan is also a component. A shorter term means a lower rate and overall reduced costs. However, you’ll pay a higher monthly payment. Rates can also vary depending on what type of loan you choose.

Mortgage Interest Rates in 2021: The Forecast

Now you know the outlook for mortgage interest rates in 2021 and how interest rates can impact buying a house.

While mortgage interest rates are expected to stay low, they will slightly rise, which could add hundreds of dollars to your monthly payment and tens of thousands of dollars to your loan.

New Again Houses buys, remodels, and sells houses. We can help you obtain financing and shop for a home. Contact us today for a free consultation!

Andy Vincent

Andy strives to help individuals get out of troubling situations with their unwanted properties. With a business management and entrepreneurship background as well as being a realtor, he is able to help individuals come up with the correct resolutions to their issues and make the process easy and transparent for every party.

We buy houses and transform them into fully remodeled homes.

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