Mortgage Rates Forecast for May 2021

Mortgage Interest Rates Predictions

Person looking at graphs on iPad

While noting last week that interest rates currently remain under 3% Freddie Mac added, “the good news is that with rates under three percent, refinancing continues to be attractive for many borrowers who financed before 2020.” However, they also warned of mortgage rate increases. “There is a potential headwind that could slow housing market activity; higher mortgage interest rates could dampen demand and cool off the single-family housing market. We forecast that mortgage rates will continue to rise through the end of next year.”

Let’s take a look at some other economic indicators to help better understand where mortgage rates may go during the month of May.

10-Year Treasury Bond

The 10-year Treasury yield is closely watched as an indicator of broader investor confidence. This is because Treasury bills, notes, and bonds are considered safe investments because they carry the full backing of the U.S. government. The 10-year yield is used as a proxy for mortgage rates, as well as a sign of investor sentiment about the economy. This week CNBC reported that the, “U.S. Treasury yields fell on Tuesday, continuing recent weakness even as the nation’s economy shows signs of recovery and rising inflation.”

 

Federal Reserve and Economic Outlook

Another sign that rates are likely to soon rise came from Treasury Secretary Janet Yellin who indicated that rates may have to rise to keep the economy from overheating primarily because of trillions in recent government stimulus spending. During an economic forum Yellin stated, “it may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat.”

 

Is Inflation Looming?

Warren Buffet also recently warned about an overheated economy and the likelihood of rising inflation. According to Bloomberg, “…as growth roars back and interest rates remain low, many are raising prices and there is more inflation than people would have anticipated six months ago.” Further alarm bells for a possible surge in inflation came from The Hill. “Some are drawing parallels to the inflationary dynamics prevalent in the 1960s and fretting about a potential replay of the 1970’s ‘Great Inflation’ episode.”  Additionally, the Governor of the Bank of England projected this week that inflation will be “a bit bumpy this year.”

 

Should I Refinance Now?

With the rapidly recovering economy causing warnings of higher inflation, rates could begin to rise this month. As we have seen, by raising interest rates the Fed aims to control economic growth and the rate of inflation. Refinancing while rates are still below historic norms would likely lower your mortgage rate and thereby reduce your monthly mortgage payment.

Related options include changing your loan type and term or going from an ARM to fixed payments since doing any of these could potentially put thousands of dollars in your pocket. Additionally, a refinance could shorten the term of your mortgage and/or allow you to pay it off sooner. Another positive aspect of refinancing is potentially eliminating PMI (private mortgage insurance.) Learn more about eliminating PMI here.

 

Should I Buy a House Now?

Potential higher inflation and the likelihood of higher interest rates are recurring themes this week. However, homebuyers still have a tremendous opportunity to lock in interest rates that are still near historic lows. Market conditions are helping to make fulfilling the dream of owning a first or second home more affordable so now might be a good time to make it happen.

Potential homebuyers or current borrowers should take note of predictions for rate changes in May 2021. Even slight increases in mortgage rates could mean missing out on potentially being able to save thousands of dollars.