Mortgage rates dip below 3% and give homeowners a new shot at a cheap refinance

Homeowners who were waiting to refinance until mortgage rates became a little more favorable just got their wish.

Rates on some of America’s most popular types of home loans have fallen once again, and rates on 30-year mortgages are back beneath a major threshold, according to new data from a long-running survey.

Mortgage rates had spiked at the end of September, so the new declines are something of a surprise — and a pleasant one for homeowners, because rates at their current levels have reopened the door to significant refinance savings.

But if the factors behind the drop in rates are temporary, as many expect, the cost of a refi could start climbing again quickly.

30-year fixed mortgage rates

The average interest rate on 30-year fixed-rate mortgages ticked back under the 3% line last week, going from 3.01% to 2.99%, mortgage giant Freddie Mac reported on Thursday.

At this time a year ago, the 30-year fixed was averaging 2.87%. And that's an important detail.

Even though the COVID-19 situation in the U.S. worsened in recent months, the economy is in far better shape today than it was a year ago. Without the widespread business closures and lack of travel that hampered economic growth in late 2020, there’s less downward pressure on mortgage rates today.

So why did rates decline last week? One expert attributes the movement to the ongoing congressional conflict over the nation’s debt.

“Investor worries about the debt ceiling standoff in Congress outweighed the stronger-than-expected ADP private employment report, declining jobless claims, and solid gains in factory orders," says Realtor.com manager of economic research George Ratiu.

Payroll processing firm ADP reported last Wednesday that companies were surprisingly quick to hire last month. But two days later, the government's employment report showed the number of new jobs added to the economy in September was the weakest in nine months.

15-year fixed mortgage rates

The average rate on 15-year fixed-rate mortgages took a slide last week, decreasing from 2.28% to 2.23%, Freddie Mac.

Unlike the 30-year, the 15-year fixed is still more affordable than it was a year ago, when it averaged 2.37%.

That’s especially good news for homeowners, as 15-year mortgages are a popular choice for refinances. The shorter loan term means you’ll pay far less in interest — and can own your home sooner. The trade-off is that your monthly payments will be higher than if you opt for a 30-year.

It’s important to keep in mind that the figures shared by Freddie Mac are just averages. Some lenders are offering even lower mortgage rates, including 15-year loans very close to 2%.

5-year adjustable mortgage rates

Bucking the trend last week were the rates on five-year adjustable-rate mortgages, also known as 5/1 ARMs. The average rate on a 5/1 ARM moved higher, from 2.48% to 2.52%.

Despite the increase, ARMs are still cheaper than they were a year ago, when the average rate was 2.89%.

Adjustable-rate loans combine the stability associated with fixed-rate mortgages and the affordability of adjustable rates.

A 5/1 ARM, for example, has an initial five-year period with an interest rate that doesn’t change. Then, the rate will adjust, either up or down, once a year.

Sub-3% rates aren't expected to last

Though employment in the U.S. is looking bumpy, other recent reports have indicated the economy is on the road to recovery. At the same time, there are growing signs that higher inflation may stick around a while.

Given that backdrop, the Federal Reserve has indicated it's planning to scale back one of its pandemic-era strategies: its monthly purchases of billions of dollars in bonds and mortgage-backed securities. That buying has helped keep mortgage rates low.

Economist Ratiu says he expects mortgage rates "to continue on an upward trajectory over the next few months, as economic indicators point toward continued expansion and financial markets take into account expected monetary tightening" on the part of the Fed.

But right now, borrowers have a brief window before mortgage rates are allowed to resume their normal behavior. That offers a good opportunity for homeowners to refinance their mortgages, says Sara Rutledge, chief economist at real estate investor information platform Millionacres.

"Even with the short-term volatility, we don't expect rates to come close to 4% for the rest of the year," Rutledge says.

How to score the lowest mortgage rate

While it's true that 30-year mortgage rates are averaging less than 3% again, a lender may not automatically offer you the lowest interest rate available. But there are steps that can increase your odds of bagging a great rate.

You’ll want to check mortgage rates from at least five lenders to see who's offering loans that fit your budget. Studies from Freddie Mac and others have shown that comparison shopping can lead to considerable savings on a mortgage.

It's hard to be approved for a home loan, let alone nab a sexy rate, if your finances are clogged with a bunch of nagging, high-interest debts, like credit card balances. Rolling them into a single, lower-interest debt consolidation loan will slash your interest charges, make the debt more manageable — and free up the kind of cash flow lenders like their applicants to have.

If a refinance isn’t in the cards, you have other ways of reducing the cost of homeownership. For example, when the time comes to buy or renew homeowners insurance, make sure you get quotes from multiple insurers. It’s quick and easy, and you could save hundreds of dollars.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.