With mortgage rates under 3%, homeowners race to refinance

Mortgage rates below 3% have brought homeowners stampeding back to the refinance market.

A sharp rise in refi demand is driving an increase in overall mortgage applications, a new report shows.

Refinancing to take advantage of mortgage rates that remain far below historical averages can be a smart play. Because with the economy recovering and over 116 million Americans now fully vaccinated against COVID-19, sub-3% rates may not be around much longer.

Mortgage applications rise on refinance strength

Mortgage applications increased 2.1% last week, the Mortgage Bankers Association, or MBA, reported on Wednesday. It was a sharp recovery from the previous week, when mortgage activity fell by 0.9%.

But while rates on 30-year fixed rate mortgages are averaging just 2.96%, according to mortgage giant Freddie Mac, cheap mortgages apparently haven’t been enough to help homebuyers overcome the challenges of low supply and rising prices. Purchase applications increased only 1% from the previous week.

“Most markets this spring continue to see robust demand, but activity continues to be constrained by insufficient inventory levels, as well as homebuilder challenges related to the ongoing shortages and price increases for building materials,” says Joel Kan, the MBA’s forecaster, in a news release.

Still, the desire to buy remains strong. Purchase applications were up 13% compared to the same week last year.

“The purchase market is thriving at a very high level of activity,” Corey Burr, senior vice president at TTR Sotheby’s International Realty in Washington, D.C., tells MoneyWise. “It’s close to a mania, and it’s difficult to see how the market can get any hotter.”

The refinance market, however, is where the real action is taking place. “3% seems to be the key level at which borrowers will refinance,” Burr says.

Homeowners are flooding the market with refinance requests, maybe because they sense a rise in rates is around the corner. Refi applications rose by 3% to hit their highest level in eight weeks, MBA says, and refinances made up a hearty 61.3% of all mortgage applications.

“Additionally, refinance loan balances increased for the fourth straight week, an indication that higher-balance borrowers acted to take quick advantage of lower rates,” says Kan.

Is the refi window closing?

The U.S. economy is in far better shape than it was at this time a year ago. (Man, does that feel good to say.) But once businesses reopen and people are able to go back to work full time, mortgage rates will inevitably rise.

Burr feels that day won’t arrive for a while.

“It will take some time for the economy to build up a head of steam and roar back to the amazing strength it had at the beginning of 2020,” he says. “Rates will increase when the economy shows strong and sustained growth, but that may not happen for several years.”

Rates may not spike for some time, but it’s hard to predict how long they’ll stay as low as they are.

Once rates ticked below 3%, mortgage technology and data provider Black Knight calculated that about 13 million Americans could still save a pile of cash by refinancing.

If you’re a homeowner with a 30-year mortgage and you’ve built up 20% equity in your home, Black Knight says you could save an average $283 a month on your mortgage payments through a refi.

A solid credit score can help you get a good deal on a refinance loan, and today it’s easy to check your credit score for free.

How to score a great mortgage rate

Just because mortgage rates have ticked down doesn’t mean lenders will automatically offer you the lowest interest rate available. That usually requires a little bit of effort on your part.

But it’s totally worth it.

If you still haven’t refinanced your home, you’ll want to check mortgage rates from at least five lenders to see who’s offering rates that fit your budget. Comparison shopping can help you save big on a new mortgage.

Note that it’s hard to be approved for a home loan, let alone nab a sexy rate, if you’re carrying a ton of high-interest debt. If payments to multiple creditors are gumming up your homebuying plans, consider taking out a debt consolidation loan.

By rolling all of your debts into a single, lower-interest loan, you’ll pay far less in interest charges and wipe out your debt faster. That could free up the kind of cash flow lenders want to see in their applicants.

Don’t get too down if a refi just isn’t in the cards. You can always find other ways of decreasing the cost of homeownership. For example, when the time comes to buy or renew homeowners insurance, make sure you get quotes from multiple insurers — because you could save hundreds of dollars.

Clayton Jarvis