Mortgage Rate Forecast for 2021: Another Year of Killer Deals?

Key highlights from this report:

  • A recent mortgage rate forecast for 2021 offered good news for borrowers.
  • Rates are predicted to remain low over the coming months and into next year.
  • Predictions came from Freddie Mac and the Mortgage Bankers Association.
  • Thirty-year home loan rates recently sank to an all-time low of 2.98%.

Just went you think mortgage rates in the U.S. couldn’t possibly drop any lower, they smash through the “glass floor” and set another record.

That’s exactly what happened last week, and it marks another chapter in what has been a historical downward trend for home loan rates. And recent predictions suggest we could see more of the same in 2021.

Rates Fall Below 3% in July, for the First Time in History

Last week, the government-sponsored mortgage buyer Freddie Mac announced that the average rate for a 30-year fixed home loan sank to 2.98%. That was its lowest level ever, in more than 50 years of industry surveys. And it could sink lower in the weeks ahead, if the latest mortgage rate forecasts are any indication.

Rate chart July 2020
Chart: 30-year mortgage rates over the past year. Source: Freddie Mac.

The chart above shows the average rate for a 30-year fixed home loan (the most popular mortgage product among home buyers in America) going back a year or so. It pretty much speaks for itself.

This downward trend has led to a surge in demand from home buyers. According to the Mortgage Bankers Association, purchase loan activity was 16% higher during the week ending on July 10, 2020, when compared to the same week a year earlier. So clearly, buyers are paying attention.

Freddie Mac’s research team commented on this in their latest survey report, stating: “Mortgage rates fell below 3 percent for the first time in 50 years. The drop has led to increased homebuyer demand…”

Mortgage Rate Forecast for 2021: More of the Same?

Getting back to the topic at hand, what’s the mortgage rate forecast and outlook for 2021? Will rates continue to hover in their current low range, or rise through the second half of 2020? And how might this affect home buyers and mortgage shoppers across the U.S.?

Here’s the short answer: The latest mortgage rate forecasts for 2021 suggest that rates will continue to remain in the low-3% range into next year. But there’s no guarantee that will actually happen. These forecasts have been wrong in the past. Take with a grain of salt.

The one thing we do know is that rates are currently hovering at record-low levels, as of summer 2020. And the general consensus is that they’ll stay low for the foreseeable future, though that’s far from certain.

In its most recent forecast for mortgage rates and home prices (published on June 16), the economic research team at Freddie Mac predicted that 30-year rates would end up averaging 3.4% for 2020, and 3.2% in 2021.

The 2020 average mentioned above is skewed upward by the higher rates we saw at the start of this year. Back in January, 30-year fixed home loans were averaging around 3.6% — quite a bit higher than where they are now. That’s why Freddie Mac expects them to average 3.4% for the entire year, even though they’re currently hovering below 3%.

Looking forward, their mortgage rate forecast for 2021 predicts an average rate of 3.2% for next year. So they don’t seem to anticipate a sharp rise or upward trend anytime soon.

According to Sam Khater, chief economist at Freddie Mac:

“While the housing market undoubtedly has felt the effects of COVID-19, we are encouraged by recent homebuyer demand as well as mortgage rates that should remain at record lows for the foreseeable future.”

A General Consensus Among Forecasters

The Mortgage Bankers Association (MBA), an industry group, offered a similar forecast for home loan interest rates in 2021. But they expect them to inch upward a bit over the coming months.

In its latest “Mortgage Finance Forecast” report, issued on July 15, the MBA’s research team predicted that 30-year loans rates would average 3.2% and 3.3% during the last two quarters of 2020. Beyond that, they predicted an average of 3.4% for the first half of 2021.

Interest rates will likely fluctuate up and down over the coming weeks, with the occasional downward or upward “streak.” That’s usually how it goes. But the big takeaway here is that economists have forecast a continuation of our current low-rate environment, with 30-year fixed mortgages hovering in the low-3% range through 2020 and into 2021.

Lots of Happy Homeowners in 2020

As you might have imagined, the trends outlined above have increased demand for mortgage refinance loans among homeowners in the U.S.

Many homeowners who had higher mortgage rates on their previous loans have refinanced into new ones, securing a lower rate in the process. This, in turn, leads to a lower monthly payment and less interest paid over time, a win-win for homeowners. And those benefits will likely continue through 2020 and into 2021.

According to Freddie Mac’s Economic & Housing Research Group:

“We expect refinance originations to reach $1.9 trillion in 2020 and then decline to $1.3 trillion in 2021. Purchase originations are expected to decline due to the drop in home sales and reach $1.0 trillion in 2020, and then we expect the purchase market to rise to $1.2 trillion in 2021.”

So it’s a big year for refinancing. And, as mentioned earlier, purchase loans from home buyers have also risen in response to the record-low rates.

The Broader Economy, Not So Good

Mortgage rates are incredibly low right now, and the latest forecasts and predictions suggest they’ll stay that way for quite some time. Unfortunately, the boarder economic picture is not so rosy.

U.S. coronavirus (COVID-19) cases are soaring right now, as of July 2020. This has caused many governors to roll back their reopening plans and reissue shutdown orders.

Just yesterday, the nation posted more than 71,000 new COVID-19 cases, making it the second day in a row with more than 70,000 new infections. That’s based on data compiled by Johns Hopkins University and published online.

Meanwhile, the president continues to pretend that the nation’s public health crisis is being managed well, even as it rages out of control. Earlier today, Trump told Fox News’s Chris Wallace:

“We’ll put out the flames. And we’ll put out in some cases just burning embers. We also have burning embers. We have embers and we do have flames. Florida became more flame like, but it’s going to be under control.”

Going forward, an economic backslide will likely send the U.S. unemployment rate soaring again, erasing the job gains made last month. One step forward, two steps back.

Disclaimer: This story contains mortgage rate forecasts and predictions extending into 2021. They were provided by third parties not associated with the Home Buying Institute. Economic and housing-related forecasts are the equivalent of an educated guess and should be treated as such.