What Is it About 3% Mortgage Rates That Has Homeowners So Spooked?

Rates rise, mortgage applications sink

Mortgage applications sank 6.9% last week, Mortgage Bankers Association reported on Wednesday.

"Mortgage application volume fell to the lowest level in almost a year and a half, with declines in both refinance and purchase applications," says Mike Fratantoni, the MBA's chief economist.

Refi requests dropped by 8% compared to the previous week and were 15% lower versus same week a year ago. Refinances also accounted for a smaller share of overall mortgage activity last week, falling from 62.5% to 61.9%

Applications for loans to buy homes were down 5% week-over-week, and were 6% lower than a year ago. Those purchase applications last week hit their lowest level since May 2020, largely because buyers are having trouble finding properties they can afford in what remains a severely undersupplied housing market.

Corey Burr, senior vice president at TTR Sotheby’s International Realty in Washington, D.C., says buyers may have an easier go of it in the second half of the year. The market usually cools after July, plus older homeowners may more willing to list their homes as it becomes clearer COVID-19 is no longer a threat to their health.

"This should lead to increased days on the market, in general, and fewer multiple-bid situations," Burr says.

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The wrong idea about 3.02% mortgage rates

Last week's dip in loan demand came as mortgage giant Freddie Mac announced that the average rate on a 30-year fixed mortgage jumped from 2.93% to 3.02% — crossing the 3% threshold for the first time in 10 weeks.

The typical rate had landed squarely at 3% back on May 20, according to Freddie Mac. That week, demand for refis fell by 7%.

At the time, Burr attributed the drop in refinance applications to savvy consumers betting on rates falling below 3% again. (Turns out they were right.) With the latest decline, there may be an additional factor at play.

“Having lost out on the summer of 2020, most of the country wants to travel and make up for lost recreation. With this mentality, thoughts of shaving tenths of a percentage point off of a mortgage via refinancing will go to the back burner," Burr says.

There’s no telling where mortgage rates will be once Americans have gotten their fill of summer freedom, but many homeowners may look back on the days of 3.02% mortgage rates and wonder why they didn’t act when borrowing costs were so low.

"As the economy progresses and inflation remains elevated, we expect that rates will continue to gradually rise in the second half of the year," Freddie Mac said in a statement last week. The company's latest forecast anticipates 30-year rates will be averaging 3.4% by the fourth quarter of 2021.

How to get the best refi deal

Despite last year's ultra-low mortgage rates, more than three-quarters of homeowners (78%) passed on refinancing during 2020, a recent Zillow study found.

If you've been thinking it over for months but still aren't ready to refi, be sure you know how to seek out the lowest mortgage rate possible once you finally get the ball rolling.

The best rates tend to be offered to homeowners with the strongest credit. You can easily check your credit score for free — and you may learn you need to bring it up a few notches before applying for your new loan.

When it's time to find a lender, shop around to identify the lowest mortgage rate available in your area and for a person with your credit score. Studies from Freddie Mac and others have found that comparing at least five mortgage offers is key to saving the most on your mortgage.

Lenders will want to see your cash flow is steady enough so you'll be able to afford your monthly payments. They won't have much confidence if you're already carrying multiple high-interest debts. Consider rolling those balances into a single, lower-interest debt consolidation loan, to reduce the cost of your debt and pay it off sooner.

If a refi just isn't going to happen, you have other ways to cut the costs of homeownership. When you buy or renew your homeowners insurance, get quotes from multiple insurers to be certain you’re not paying more than you should.