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Mortgage rates have been on an upward journey for the past four weeks, and they continue into the 3% range today. The average rate on a 30-year fixed-rate mortgage has hit 3.05%, the highest it’s been since July 2020.

It’s no surprise that higher rates are expected to tranquilize mortgage lending, especially for homeowners who want to refinance. We’re already seeing this play out in the weekly numbers.

This time last year, the number of mortgage refinance applications were 43% higher. This is the fourth week out of five that refinance applications were down, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 5, 2021.

Related: Compare the Best Mortgage Lenders

The 10-year Treasury Yield Is Rising, Which Could Cost Mortgage Borrowers

Thanks to immense government cash infusions and three vaccines with varying degrees of effectiveness, the economy has begun to escape from the Covid-19 crisis. The emergent recovery has pushed yields on the 10-year Treasury above 1.5% and narrowed the spread between the 30-year fixed-rate mortgage.

Typically, 10-year Treasury yields and mortgage rates move along the same trajectory, so lenders are keeping a close eye on both. If yields keep rising, this will likely put upward pressure on rates, which means higher lending costs for consumers.

“Some lenders commented that for now, they are willing to absorb some of these costs to maintain volume,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “However, in the longer term, continued upward pressures on interest rates would likely dampen home sales and mortgage originations as lenders raise mortgage rates. This, in turn, might push lenders to reduce their production capabilities.”

Thanks to a competitive market crowded with online lenders, banks and credit unions, lenders expect shrinking profit margins in the coming months even as homebuying activity is expected to take off this spring.

According to Fannie Mae’s Q1 2021 Mortgage Lender Sentiment Survey, 52% of lenders forecast that their profit margins will drop—that’s up from 48% in the prior quarter. At the same time, 71% of lenders expect demand for first mortgages to rise in the coming months.

30-year Fixed-rate Mortgages

The average rate for the benchmark 30-year fixed mortgage crept up 3 basis points to 3.05%, according to Freddie Mac’s Primary Mortgage Market Survey. This time last year, the 30-year fixed was 3.36%.

Borrowers with a 30-year fixed-rate mortgage of $300,000 with today’s interest rate of 3.05% would pay $1,272.92 per month in principal and interest (taxes and fees not included), the Forbes Advisor mortgage calculator shows. The total interest paid over the life of the loan would be $158,249.88.

That same mortgage taken out a year ago would cost an additional $18,317.75 in interest over the life of the loan.

15-year Fixed-rate Mortgages

The average interest rate on the 15-year fixed mortgage rose 4 basis points to 2.38%. This time last year, the 15-year fixed-rate mortgage was at 2.77%.

Borrowers with a 15-year fixed-rate mortgage of $300,000 with today’s interest rate of 2.38% would pay $1,983.47 per month in principal and interest (taxes and fees not included). The total interest paid over the life of the loan would be $57,023.74.

5/1 ARMs

The average rate on a 5/1 adjustable-rate mortgage ticked up 4 basis points to 2.77%. Last year, the 5/1 ARM was 3.01%.

ARMs are home loans that have an interest rate that fluctuates with the market. In the case of 5/1 ARMs, the first five years have a fixed rate and then switch to a variable rate after that. That means when the average rate rises or falls, so will your rate.

Traditionally, ARMs have lower interest rates than fixed-rate options, making them an attractive choice for borrowers who plan to sell before the fixed period expires.

What Low Rates Mean for Borrowers

Mortgage rates are at record lows, so this could be an opportune time for many folks who want to save money on a new home loan or refinance their existing mortgage.

Borrowers who want to get the lowest rate should make sure they have a credit score of at least 760. Lenders reserve their ultra-low rates for those with a strong credit profile, as this is a major indicator that borrowers are at low risk for late payments or default. In fact, borrowers with lower credit scores can be charged one percentage point or more higher than borrowers with very good or excellent scores.

Before you apply for a mortgage, check your credit score. Many banks and credit cards allow you to do this for free. One way you can improve your score relatively quickly is to pay down debt. You also can request credit for paying monthly bills on time, such as your internet or utility bills.

In addition to your credit score, lenders will look at your debt-to-income ratio, or DTI. This is your total monthly debt divided by your gross monthly income. It’s basically a snapshot of how much you owe versus how much you earn. The lower your DTI, the better chances you have of getting a lower interest rate. Most lenders require a minimum DTI of 43% just to qualify for a mortgage or refinance.

Finally, studies have shown that people who shop around tend to get lower rates than those who get a mortgage from the first lender they talk to. Know what the current average interest rate is as well as what your credit score, income, debt and expenses are before you start applying. If lenders offer you a rate that’s higher than you expected, be sure to ask them why so you can begin improving those areas to qualify for a lower rate.

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