Mortgage Interest Rates Forecast

Holden LewisJanuary 22, 2021

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Mortgage rates today: Friday, Jan. 22, 2021

On Friday, Jan. 22, 2021, the average interest rate on a 30-year fixed-rate mortgage fell four basis points to 2.908% APR. The average rate on a 15-year fixed-rate mortgage dropped four basis points to 2.452% APR and the average rate on a 5/1 adjustable-rate mortgage rose four basis points to 3.036% APR, according to rates provided to NerdWallet by Zillow. The 30-year fixed-rate mortgage is 11 basis points lower than one week ago and 95 basis points lower than one year ago. A basis point is one one-hundredth of one percent. Rates are expressed as annual percentage rate, or APR.

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Mortgage rates this week

Mortgage rates fell across the board this week, with the 30-year fixed-rate home loan slipping below 3%.

  • The 30-year fixed-rate mortgage averaged 2.95% APR, down 5 basis points from the previous week's average.

  • The 15-year fixed-rate mortgage averaged 2.51% APR, down 10 basis points from the previous week's average.

  • The five-year adjustable-rate mortgage averaged 3% APR, down 2 basis points from the previous week's average.

Even though mortgage rates fell during the week, they are a bit higher than they were in November and early December. The upward trend is driven by the improved prospect of financial relief, now that one party controls the White House and both houses of Congress. The possibility of faster economic growth has put a floor under mortgage rates.

Still, mortgage rates are low by historical standards, keeping house payments lower than they would be otherwise. Home sales have been vigorous since summer, despite a shortage of house listings resulting from the COVID-19 pandemic.

Existing home sales grew to an annual pace of 6.76 million units in December, up 22% from 12 months earlier. Meanwhile, just 1.9 months' worth of homes were on the market at the end of the month, a record low, according to the National Association of Realtors.

With few houses on the market but strong demand from buyers, you can predict what happened to prices in December: The median price rose to $309,800, up 12.9% compared with 12 months earlier.

House prices are almost certain to continue rising for a long time, as the population bulge of millennials and Gen Zers ages into the prime first-time homebuying years. Meanwhile, homebuilders are increasing production. In December, builders started construction on homes at an annual pace of 1.669 million units, according to the U.S. Census Bureau and the Department of Housing and Urban Development. That was the busiest month for housing starts since September 2006. Even at December's rate, it could take years of homebuilding before buyers nationwide feel satisfied that they have enough to choose from.

January mortgage rates forecast

The year should begin with mortgage rates near historically low levels, with the 30-year fixed-rate mortgage averaging under 3%. Rates will remain low in January.

Today's mortgage rates sprouted from the pandemic and the resulting recession, in which millions of jobs withered. Some lost jobs will return in 2021, but the economy is unlikely to flourish enough to push mortgage rates significantly higher in January, or indeed the first half of the year.

It feels hollow to celebrate the benefits of low mortgage rates when they are the fruit of rampant hardship. But as Miranda Lambert sang in "Virginia Bluebell," "Even through a stone, a flower can bloom." These low rates offer homeowners an opportunity to save money by refinancing. For home buyers who qualify for mortgages, the low rates increase buying power compared with a year ago.

Big savings by refinancing

More than 6 million homeowners refinanced in the first nine months of 2020, and many millions more could save money by refinancing, according to Black Knight, a mortgage analytics company.

The average rate on a 30-year fixed-rate mortgage was around 4% APR at the beginning of 2020, and had fallen to around 3% in mid-December. Here's how a rate drop of that magnitude translates into payments on a 30-year fixed-rate mortgage for $200,000:

  • At an interest rate of 4%, the monthly principal-and-interest payment is $954.83.

  • At an interest rate of 3%, the monthly principal-and-interest payment is $843.21, or $111.62 less.

No wonder millions of people refinanced in 2020.

Upgraded affordability

Because of lower rates, borrowed money goes further in 2021 than it went at the beginning of 2020. Here's the effect on buying power when the 30-year fixed mortgage rate drops from 4% to 3%:

  • At an interest rate of 4%, you can borrow $209,500 with a principal-and-interest payment of about $1,000 a month.

  • At an interest rate of 3%, you can borrow $237,200 with a principal-and-interest payment of about $1,000 a month, or $27,700 more.

Here are three caveats to this news:

  1. Not enough homes are for sale to meet demand. Of homes sold in November, 73% were on the market less than a month, according to the National Association of Realtors. Because demand for homes exceeds supply, prices are going up fast.

  2. Rising home prices have roughly kept pace with the increased loan affordability. The median price of an existing home went up 14.6% in the 12 months ending in November, NAR says. Meanwhile, the example above shows that borrowing power increased 13% with a 1 percentage point drop in the interest rate.

  3. Millions of people are jobless. Without steady income, they are unable to qualify for mortgages.

2020 was a brutal year. Here's hoping that 2021's economic recovery brings good jobs to people who were laid off or endured reduced income. When people are ready to buy homes in 2021, low mortgage rates will await them.

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