30-Year Mortgage Rate Tops 3% for First Time Since July

Mortgage rates fell throughout most of 2020 after the Covid-19 pandemic ravaged the economy. That helped power the biggest boom in mortgage lending since before the financial crisis, fueled by refinancings. When rates hit 2.98% in July, it was their first time under the 3% mark in about 50 years of record-keeping.

The recent upward moves paint a clear contrast: More vaccinations in the U.S. and recent progress on the latest coronavirus relief bill have brightened investors’ outlook on the economy, a key variable in determining borrowing rates.

Mortgage rates tend to move in the same direction as the yield on the 10-year Treasury, which has been rising. Treasury yields rise when investors feel confident enough in the economy to forgo safe-haven assets such as bonds for riskier ones including stocks. Last week, the yield hit its highest level in a year.

Freddie Mac chief economist

Sam Khater

said he expects a strong sales season, partly because he thinks “the uptrend in rates from here will be more muted than the past few weeks.” The Federal Reserve has said it would maintain ultralow interest rates until the economy improves.

“The Fed has seen the carnage from the last crisis, and they don’t want to pre-empt the recovery by starting to raise rates and choking off that nascent recovery,” Mr. Khater said.

However, rising rates have started to weigh on home purchase and refinance applications in recent weeks.

Higher mortgage rates could discourage some would-be buyers from trying to purchase a home during the key spring selling season, because higher interest rates translate into larger monthly payments. That could prompt people to search for a cheaper house or to put their homeownership goal on hold.

Even before the recent climb in rates, surging U.S. home prices had begun to outweigh the savings afforded by historically low borrowing rates. The typical monthly mortgage payment in the fourth quarter rose to $1,040 from $1,020 a year earlier even as mortgage rates declined, according to the National Association of Realtors.

Rising rates can also put the brakes on refinancings, which accounted for about 60% of mortgage originations in 2020, according to the Mortgage Bankers Association.

With a 30-year rate of 2.75%, about 18 million U.S. homeowners could reduce their monthly payments through a refinance, according to mortgage-data firm

Black Knight Inc.

When the rate rises to 3.25%, the pool of eligible homeowners shrinks to about 11 million.

Homeowners such as Lindsay Ellis of Charlotte, N.C., who closed on a refinance last month, may have locked in some of the lowest mortgage rates available for the foreseeable future.

Ms. Ellis cut the rate on her condo from about 4.6% to 2.9% through a refinance with

Rocket

Cos. She hasn’t decided where she’ll put the roughly $160 in monthly savings, but she plans to explore different investment options.

“I didn’t have to do a lot of the work to shop around and compare rates because the rate they gave me was great,” she said.

Ms. Ellis wouldn’t have qualified for a refinance when rates began falling last year because unemployment benefits kept her afloat for part of 2020. Ms. Ellis, a fitness director, was furloughed from her job last St. Patrick’s Day and couldn’t return until the fall. She began to consider the refinance shortly after.

Write to Orla McCaffrey at orla.mccaffrey@wsj.com