A Homebuyer’s Guide to Record-Low Mortgage Rates in 2020
To say the economy has been tough in 2020 would be an understatement. The coronavirus pandemic has caused significant damage to the job market, which has led to a record-breaking number of unemployment claims filed in recent months. And, as the months roll on, the hits from the COVID-19 pandemic just keep coming.
Still, despite this year’s economic turmoil, a surprising number of Americans think that 2020 is an ideal time to make a property purchase. According to a recent survey by Interest.com, about 30% of the participants agreed that this is an ideal time to buy a home — and nearly 70% of those in agreement think that 2020 is the best time for them to purchase a house or property due to low mortgage interest rates.
Less surprising? Another 40% of survey participants said that 2020 is not an ideal time because of economic uncertainty. That 40% is right — 2020 does bring with it a lot of economic turmoil, and home purchases can be risky when you aren’t sure what the future brings regarding income or investments. But the Americans who think that 2020 is an ideal time for them to purchase a home due to low interest rates are also right — mortgage rates have dropped to their lowest point in years.
But if both opinions are correct, how will you know whether or not 2020 is the right time to buy a home for you? Let’s take a look at why this could be a good time to buy a home, along with the precautions you can take to mitigate any issues with homeownership down the line.
Is 2020 really an ideal time to buy a home?
The answer to that question isn’t black and white — there are some gray areas that make it difficult to say whether it’s the right time for everyone to buy a home. What is clear, though, is that this year is a smart time for many people to purchase a home due to those bottom-rung interest rates.
Mortgage rates can fluctuate with demand, but mortgage loan interest rates rarely drop below 3%. However, it’s possible to get a mortgage with a rate under 3% right now — which is why so many people are interested in home purchases or mortgage refinances at the moment.
The average 30-year fixed loan mortgage rate for the week ending with July 30 was at 2.99% with 0.8 discount points paid, according to Freddie Mac’s Weekly Survey. That’s down 0.02 percentage points from the week prior — and just 0.01 percentage point above the all-time low set July 16.
As of Aug. 3, the average 15-year fixed-rate conventional mortgage loan had an interest rate starting at about 2.680% — which is also well below that 3% threshold.
Considering that the 30-year mortgage rate was 3.75% this time last year, a rate of 2.99% is awesome. And mortgage rates are expected to stay low for at least the remainder of 2020. The Fed’s July meeting kept the key federal funds rate at near 0%, which almost guarantees that mortgage rates will stay low for the near future.
Potential hurdles to buying a home in 2020
But, while mortgage rates are quite low right now, there are a couple of hurdles that you’ll have to get past to score a mortgage with a rate below 3% — or a mortgage at all, for that matter. Lender requirements have tightened in response to the economic damage from coronavirus, so your credit score and finances will need to be in order to secure a mortgage.
Plus, those low mortgage interest rates — and the limited housing inventory due to owners being hesitant to list their homes during a pandemic — have caused bidding wars in a lot of housing markets — including Boston, Salt Lake City and San Diego. Home sales in markets that took harder hits have also started to rebound, making it tough for buyers to get their offers accepted by the sellers.
Furthermore, the widespread home inventory shortage has been driving home prices up and causing more competition between buyers, who are looking for homes with fewer options available. So while the low rates on mortgage loans may be a perk of buying in 2020, there are some downsides to that equation as well.
In addition to those hurdles, there are also concerns that the job market won’t stabilize in the near future. Open jobs are hard to come by right now, and over 30 million people were out of work as of the end of July, which could make it tough to take the leap on such a large purchase if you’re concerned about job stability.
That said, if you’re teetering on the edge of buying a home and taking advantage of those low mortgage rates but concerns about finances or loan approval are standing in your way, there are some ways to set yourself up for success.
Tips for a smooth home purchase in 2020
Getting approved for a mortgage right now isn’t as easy as it was last year, and neither is the home buying process. The pandemic has caused lenders to be more tepid about credit products than they once were, and you’ll also have to be patient with the buying process, as the home shortage can cause some frustrations as well.
If you want to ensure a smooth home purchase during this time, you should:
Clean up your finances.
If you want to get approved for a loan right now, you’ll need to make sure your finances reflect that you can afford to pay it back. This means socking away some money into savings, paying off other loan or credit card balances, not making any large or significant purchases in the time leading up to the loan application and generally presenting a picture of your finances that won’t scare off a lender.
This can be difficult to achieve right now, as lenders aren’t loaning money as freely as they were even a few months ago. That said, it isn’t impossible to achieve. While the general rule for savings is that you should put away 3-6 months’ worth of money, you might want to sock away more than that — like 12 months’ worth of money — to prove that you can handle your mortgage payments in case of job loss.
Pay close attention to your credit.
Your credit score is going to be a significant part of the loan equation right now, and while you can still get certain loans with a lower credit score — FHA loans, for example — you’ll pay more in both required mortgage insurance and on your interest rate with some of these loans.
You’ll need to take good care of your credit if the plan is to snag a conventional loan with a low rate — and that doesn’t just mean your credit score. You also want to avoid opening any new credit accounts or hard pulls in the time leading up to your application — lenders are warier than ever of “credit-seeking” behavior, and if you appear desperate for loans or credit products, you’re going to hurt your chances of getting a mortgage loan with a prime rate.
You should pull copies of all three credit reports to go over before you apply for your mortgage. These reports are usually free to pull once a year at Annualcreditreport.com, but all three reports have been made available for free each week through April 2021 due to the coronavirus pandemic.
If you find any fraudulent or incorrect information on your reports, submit a dispute and let the process play out before you apply. If you notice any correct but negative marks on your reports, see what you can do to remove the marks — late payments and other negative information may scare off lenders, who are already dealing with a slew of mortgage deferrals and forbearances due to the economic downturn.
Review multiple lenders.
This is a no-brainer, but it’s worth reiterating: you need to shop around for lenders. Some lenders will be more hesitant to lend to buyers who aren’t picture perfect on paper, and others will still be willing to work with people who have a few issues to overcome. More importantly, though? Lenders also offer different rates — and they can vary wildly from lender to lender, so if you want to make sure you’re getting the lowest rate possible right now, you need to do your homework.
Talk to friends, family members or anyone else you know who’s made a home purchase in recent months. Find out what their experience was. Once you have an idea of whether a lender would be a good fit, get some personalized rates so that you can compare your offers.
The best way to get an idea of your rates is to go through the preapproval process with a lender. This process often requires a hard pull to your credit, but you’ll get some semi-firm interest rates in return. This will give you an idea of where you, as a buyer, fall on the borrowing spectrum. If you’re offered the lowest rates available, great. If you’re offered a higher rate than you wanted or expected, you still have plenty of options available elsewhere.
The process of getting preapproved is pretty simple, though it can take a while to complete. You’ll need to have your personal and financial information on hand, but in many cases, you can complete the process fully online and receive an answer in 1-3 days or less. Completing this process will also give you peace of mind that you’re on your way to a home loan, which can be invaluable to some buyers.
Consider ways to be flexible.
The reality of the current housing market is that in some markets — especially in larger metro areas — there are fewer houses for sale than the demand calls for. If you’re looking for a home in one of those areas, you may have to find ways to make concessions — and you may end up paying the full asking price or more than list price for the home if there’s a ton of competition. As more people aim to take advantage of the record-breaking interest rates, the more demand you’ll have for the homes on the market.
Can you put away your hopes of floor to ceiling windows, are you capable of rehabbing a fixer-upper or is there wiggle room in your budget to spend a bit more on the house of your dreams? These are the types of questions you’ll need to ask yourself if you live in an area with high demand for housing. Figure out where you can make concessions in your wants — and try to focus on your needs instead.