Low mortgage rates spark raging demand for refinances, report says

Sub-3% mortgage rates are proving too much for homeowners to resist.

While buyers are having trouble locating properties to purchase, homeowners are more than making up the difference when it comes to mortgage applications, a new report finds.

And who can blame them? Mortgage rates remain well below historical averages, making it possible to save some real money by refinancing.

But with almost 125 million Americans fully vaccinated against COVID-19, the country's march to economic recovery is getting shorter each day. Once the rebound is in full swing, those low rates won’t last.

Strong refinance demand juices mortgage applications

Mortgage applications rose 1.2% last week, the Mortgage Bankers Association (MBA) reported on Wednesday. The increase was almost half that seen the week before, when overall mortgage activity increased 2.1%.

One reason for the relatively lackluster growth was a decline in so-called purchase applications. After increasing by 1% two weeks ago, requests for loans to buy homes fell 4% last week.

That’s not too surprising, considering the claustrophobically tight market buyers are trying to navigate.

"There continues to be strong demand for buying a home, but persistent supply shortages are constraining purchase activity, and building material shortages and higher costs are making it more difficult to increase supply," says Joel Kan, MBA’s forecaster.

But with rates on 30-year fixed-rate mortgages sitting at an enticing 2.94%, according to mortgage giant Freddie Mac, homeowners are taking advantage by refinancing their loans.

Refinance applications climbed by a healthy 4% last week to make up 63.3% of all mortgage applications, an increase from 61.3% the previous week.

Rates aren't likely to stay low

"Ongoing volatility in refinance applications is likely if rates continue to oscillate around current levels,” Kan says.

Low mortgage rates are often a sign of an ailing economy, or at least one that needs a little help from the Federal Reserve to keep investors borrowing and pumping money into U.S. businesses. But once the economy is back on track, interest rates could rise sharply.

Freddie Mac and fellow government-sponsored mortgage company Fannie Mae project that 30-year fixed mortgages will average 3.2% this year. MBA thinks rates could hit 3.7% by the end of 2021.

That’s still months away, but mortgage rates are tricky things. Few experts predicted the recent fall below 3% again, so a rapid run-up isn’t totally out of the question.

Jumping on a refi while 30-year rates are still in "the 2s" could save you a pile of money. 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 13 million homeowners who could save an average $283 a month by refinancing.

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

Land a low mortgage rate before they're gone

A low-rate environment is pretty fun to play in, but to get the best rate from your lender, there are a few things you’ll want to do before you start applying for a refinance:

• Shop around. 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 either a refinance or a mortgage to buy a home.

• Diminish your debts. It's hard to be approved for a home loan, let alone be offered an attractive rate, if you’re already burdened by other, high-interest debts. By rolling all your debts into a single, lower-interest debt consolidation loan, you’ll pay far less in interest charges and be free of debt faster.

• Cut other housing costs. Don’t get too down if a refi isn’t in the cards, because there are other ways to lower the cost of homeownership. For example, when the time comes to buy or renew homeowners insurance, get quotes from multiple insurers to land the best price.