If there’s one thing we’re not short of, it’s mortgage rate forecasts. Everyone seems to have an opinion, though often they’re just that, opinions.
Still, mortgage rates are always top of mind for prospective home buyers and existing homeowners because they can translate to lots of dollars in savings.
That being said, we now have estimates all the way through 2020, thanks to the Mortgage Bankers Association.
While 2020 sounds like a far out sci-fi movie, it’s sadly just over two years away. How’d that happen?
Spoiler Alert: Mortgage Rates Are Headed Higher
I hate to be the bearer of bad news, but as you might expect, mortgage rates are expected to move higher over the next few years.
This isn’t a surprise, given their current historically low levels. But because a 30-year mortgage rate in the high 3% range has become the new normal, some might get sticker shock.
Anyway, let’s get to those predictions, shall we.
Interest rate expectations for the 30-year fixed mortgage:
End of 2017: 4%
Okay, so the 30-year is currently around 4% already, thanks to an unfavorable trend recently. And it’s nearly the end of 2017, what with it being Halloween in a week.
So we’re already at the MBA’s end of 2017 prediction.
As for next year, the trade group expects a slight, but significant increase to 4.6%.
In 2019, the 30-year fixed is expected to jump up to 5%, an emotional threshold for some, I assume.
The good news is that it’ll plateau somewhat after that, rising just about a quarter percent to 5.3% in 2020.
To put it in perspective, a 5% fixed mortgage rate is pretty attractive historically, even if it’s a percentage or so higher than today’s mortgage rate.
Let’s consider the monthly payment for a borrower with a $300,000 loan amount:
End of 2017 payment: $1,432.25
2018 payment: $1,537.93
2019 payment: $1,610.46
2020 payment: $1,665.91
That doesn’t look so bad. A borrower in 2018 with a $300,000 loan amount will face a monthly mortgage payment about $100 higher.
In 2019, the payment will be about $175 higher, and in 2020 about $230 more.
That can definitely make or break some borrowers who are on the cusp of qualification DTI-wise, and with home prices also expected to rise, it could amount to a one-two punch.
But it’s still not terrible. Of course, it will probably do in mortgage refinance activity.
Mortgage Origination Forecasts Through 2020
The MBA expects total origination volume to drop from $1.688 trillion this year to $1.597 trillion in 2018.
While not a major drop, the mix of originations will tip more toward purchase applications. Expect just $430 billion in refis next year, and nearly $1.2 trillion in purchase activity.
In 2019, total volume should actually rise to $1.64 trillion, but refis will again drop to $395 billion while purchases climb to $1.245 trillion.
A year later, $1.7 trillion in origination volume is expected, with refis flat from a year earlier and purchases rising again to $1.3 trillion.
By 2020, the refi share will have dropped to just 23% of total applications, down from around 50% in 2016 and 36% this year.
In other words, expect higher mortgage rates to dent the refinance numbers, but do nothing to slow down homes purchases.
As I’ve mentioned here on more than one occasion, higher mortgage rates don’t lead to lower home prices.
If anything, both often rise in tandem as an indication of an improving economic picture.
Of course, these are just predictions, and a lot can change between now and 2020. And mortgage rates have defied expectations year after year lately.
It’ll also be interesting to see where mortgage rates end up this year, what with it being Trump’s inauguration year. The trend still says they wind up lower than where they stood last November, around 3.75%.