Borrower beware: Mortgage rates may rise as year winds down

It’s been a strange year for the housing market.

Rates on 30-year fixed-rate mortgages started off 2020 at an average 3.72% — but mortgage rates steadily plunged to 3% and beyond amid the economic chaos caused by the coronavirus. and with help from the Federal Reserve’s decision to kick its key rate to near-zero.

At the same time, strong demand and a severe shortage of properties fueled the nation’s housing market, causing prices to spike by around 10% year over year.

With history offering no other year quite like this one, it’s tough to say what else 2020 has in store, though some experts see signs that the days of record-low mortgage rates may be ending. Here’s a look at what housing industry experts predict for the final quarter of the year.

Housing market likely to remain 'very active'

Traditionally, home sales slow in the fall and winter — but those rules may not apply this year, after COVID-19 delayed the usually busy spring homebuying season.

A combination of low rates and general confidence in the housing market “outweighs the seasonal slowdown we typically see in the fourth quarter of the year,” says Corey Burr, senior vice president at TTR Sotheby's International Realty. “I expect the market to stay very active.”

Barring more coronavirus upheaval, the fall will likely see above-average home sales — and the strong market is favoring sellers. With fewer houses on the market, increased competition for listings is driving prices up.

The national median listing price in August was $350,000, an increase of 10.1% from the same time in 2019, says the National Association of Realtors.

Even so, buyers have been able to afford more expensive houses thanks to historically low interest rates. But borrowers who haven't yet locked in a rock-bottom rate may be running out of time.

Why mortgage rates could go higher

The 30-year fixed-rate mortgage stood at an average 2.87% on the eve of the fall season, according to mortgage company Freddie Mac's survey, and the Realtors predict mortgage rates will end the year a smidgen higher, at 2.9%.

Increases can be blamed in part on a new "adverse market fee" on refinance loans taking effect this fall. The fee is raising mortgage rates by one-eighth to one-quarter of 1 percentage point (0.125 to 0.25), says Matthew Graham, chief operating officer of Mortgage News Daily.

"For some lenders, rates recently spiked significantly in a single day as they reimplemented the fee. For other lenders, it's only a matter of time," he writes.

The 0.5% fee, imposed by government-controlled mortgage giants Fannie Mae and Freddie Mac, caused mortgage rates to jump in August when the companies said the surcharge would start Sept. 1. A federal regulatory agency later delayed the fee to Dec. 1.

It will cost the average borrower an extra $1,400, says the Mortgage Bankers Association. Homebuyers and homeowners will want to search for other, offsetting savings — maybe in their homeowners insurance.

Mortgage rates are likely to feel other pressure during the quarter from forces outside the lending world, including the presidential election.

“The market’s expectations surrounding the (election) results are driving the current market,” says Andrew S. Weinberg, principal at Silver Fin Capital Group. “If the markets are surprised by the results, you would expect to see significant volatility.”

But even if rates do head higher they'll remain low by historical standards, with 30-year rates likely to remain under 3.25% through the end of the year, Burr predicts.

Why mortgage rates may go lower

A few signs point to mortgage rates potentially falling during the fourth quarter of 2020.

Fannie Mae predicts the average rate on 30-year fixed mortgages will settle at 2.8% by year’s end. And the Fed has pledged to keep its key rate near zero, possibly through the end of 2023, which will likely tamp down mortgage rates.

The central bank also is committed to buying up more Treasury bonds and mortgage-backed securities to support the economy, and those purchases are helping to drive rates lower.

A resurgence of the coronavirus during the fourth quarter could pound mortgage rates down.

"If the virus sweeps across the country or if the timing of a vaccine gets pushed back, this might result in the closing down of cities, regions or all of the country," says Burr, of TTR Sotheby's International Realty.

That kind of nightmare scenario could send investors scurrying into Treasury bonds for their perceived safety amid all of the uncertainty. When demand for bonds goes up, their interest rates (yields) go down — and mortgage rates usually likely follow.

The upshot: Mortgage rates may inch higher or lower in the coming months, but they’ll likely remain relatively cheap. Either way, consider whether buying a home or refinancing your mortgage is the right decision for you, says Grant Moon, founder and CEO of the mortgage fintech firm Home Captain.

“At this point, the difference between yesterday’s rate, today’s rate and tomorrow’s rate is small enough that homebuyers and refinancers shouldn’t wait or try to time the market for a better rate,” Moon says. "The rates are outstanding now."