A drop in mortgage rates sets off a new mini-boom in refinances

Low mortgage rates have put Americans in a borrowing mood.

Applications for both refinance and homebuyer mortgages are increasing at healthy clips, a new report finds. While strong refinance activity is to be expected when rates on home loans are as attractive as they currently are, the increase in purchases seems a little unexpected given that homes for sale are in short supply.

Both buyers and refinancing homeowners may be sensing that today's sub-3% mortgage rates could soon come to an end, as the U.S. economy gains momentum after a year of pandemic misery.

Refi demand drives jump in mortgage applicationsShutterstock

Mortgage applications rose 4.2% last week, the Mortgage Bankers Association (MBA) reported on Wednesday. The increase follows three consecutive weeks of declines.

Demand for both refinance and "purchase loans" increased, with refis up 5.5% and loans for home purchases rising 2%.

Joel Kan, the MBA's associate vice president of economic and industry forecasting, attributes the increase in refinance requests to mortgage rates hitting their lowest level since early May.

"Purchase activity also rebounded, even as supply constraints continue to slow the housing market,” Kan said in a statement, adding that the somewhat surprising gain in purchase applications came largely from an increased appetite for government loans.

The low down payments and more relaxed credit score requirements associated with federally backed mortgages — including FHA and VA home loans — are appealing to buyers trying to crack the market for the first time.

Compared to a year ago, refinance applications last week were down 22%, and purchase applications fell by 17%. That’s not necessarily a sign of a cooling market; it’s more an indication of just how out of control mortgage demand was last year at this time, when an unexpected COVID real estate boom was in full swing.

Mortgage rates likely to riseShutterstock

Thirty-year fixed mortgage rates this week are averaging just 2.93%, down from 2.96% last week, mortgage company Freddie Mac said Thursday. Rates are the lowest since mid-February.

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Americans have been enjoying a low-rate bonanza for the past year-and-change, but it won't last once the nation's COVID rebound goes from "delicate" to "definite." At that point, inflation is likely to hit 2% for a sustained period, which is what the Federal Reserve has said would prompt it to raise interest rates again.

Because of the impact of the country’s surging home prices, mortgage giant Fannie Mae projected on Wednesday that inflation will hover around 5% through the end of this year before receding to roughly 3% by the end of 2022.

That's higher than the Fed is likely to be comfortable with. High inflation reduces Americans' spending power and could take some of the steam out of the country’s COVID recovery.

With that economic uncertainty as a backdrop, Fannie Mae sees the 30-year fixed mortgage rate hitting an average 3.2% before the end of 2021and 3.3% next year.

If you're hoping mortgage rates will stay low, that's a bit of a gamble. The Fed indicated on Wednesday that interest rate hikes are likely in 2023, which is earlier than the central bank's previous projection.

Score a low rate — before it's too latefizkes / Shutterstock

If you have a 30-year mortgage and have built up 20% equity in your home, mortgage technology and data provider Black Knight says you're one of 14.1 million homeowners who could save an average $287 a month by refinancing your mortgage.

Solid credit will help you get a good deal on your refi, so check your credit score — then see what you can do to make it even stronger.

Lenders also want to see that your cash flow is steady enough that you’ll be able to cover your new mortgage payments, so consider the following:

  •  Wipe out other debts. It's hard to be approved for a home loan, let alone be offered an attractive rate, if you’re struggling to pay other, high-interest debts, including credit cards. Roll those balances into a single, lower-interest debt consolidation loan. You’ll pay much less in interest and be out of debt faster.

  •  Cut other housing costs. Look around for a better deal on your homeowners insurance. Getting quotes from multiple insurers can help you cut your premiums by hundreds of dollars a year, studies have shown.