January mortgage rates forecast

The year begins 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.

» MORE: What COVID-19 means for mortgage rates

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.