As mortgage rates start to rise, homeowners race to refinance

Mortgage rates are rising again, but so far that's not having much impact on Americans buying homes or refinancing their existing home loans.

Lenders are continuing to see healthy growth in both refinance and homebuyer mortgage applications, a new report says. Mortgage rates remain at historic lows, despite recent increases, and are keeping refinance activity going strong. Purchase loan demand is increasing more modestly, due to low supplies of homes for sale.

Both buyers and refinancing homeowners may be sensing that today’s 3% mortgage rates may not last much longer as the U.S. economy bounces back from the worst of the pandemic.

Mortgage requests increase, led by refis

Mortgage applications rose 2.1% last week, the Mortgage Bankers Association (MBA) reported on Wednesday. The increase follows a jump of 4.2% a week earlier, coming after three weeks of steady declines.

Demand for both refinance and purchase loans increased, with refis up 4% and loans to buy homes rising 1% on a seasonally adjusted basis.

Joel Kan, the MBA's associate vice president of economic and industry forecasting, notes that mortgage rates increased last week in the trade group's survey, with the 30-year fixed rate rising from 3.11% to 3.18% — the highest in a month.

“Despite the jump in rates, refinances increased for the second consecutive week," Kan says. Refinance loans also accounted for 62.5% of all new mortgage borrowing, up from 61.7% a week earlier.

Compared to a year ago, refinance applications last week were down 9%, and purchase applications fell by 14%. That's mostly a reflection of just how out of control mortgage demand was last year at this time, when ultra-low rates fueled a COVID real estate boom.

Mortgage rates likely to keep going up

Another new report also shows mortgage rates are moving up: Mortgage giant Freddie Mac on Thursday said 30-year rates this week have jumped to an average 3.02%, from 2.93% last week. It's the first time in 10 weeks that the benchmark mortgage rate has topped 3%.

The low-rate bonanza Americans have been enjoying for more than a year won't last once the nation's COVID recovery looks more solid.

At that point, inflation is likely to hit 2% for a sustained period, which is what the Federal Reserve has said it wants to see before it will raise interest rates again. The Fed has helped keep mortgage rates low by holding a key borrowing cost close to 0%.

As the economy improves, rates on home loans will climb, Freddie Mac says. The company is currently forecasting that 30-year fixed rates will average 3.2% this year and 3.7% in 2022.

"For those homeowners who have not yet refinanced – and there remain many borrowers who could benefit from doing so – now is the time," says Sam Khater, Freddie Mac's chief economist, in a statement.

Land a money-saving refi while you can

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

Solid credit will help you get a good deal on your refi, so check your credit score — then see what you can do if you need to beef it up.

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:

• Deal with your other debts. It's hard to be approved for any home loan if you’re struggling to pay other, high-interest debts, including credit cards. Sweep those balances into a single, lower-interest debt consolidation loan. You’ll slash your interest charges and dump your debt much faster.

• Cut your housing costs. Look around for a better deal on your homeowners insurance. If you get quotes from multiple insurers, you might cut your premiums by hundreds of dollars a year, according to studies from Freddie Mac and others.