The coronavirus pandemic has caused interest rates to reach record lows, which means it’s cheaper than ever to borrow money for a home loan. Still, with a recession due to a pandemic on the horizon, you may be wondering, is now a good time to get a mortgage? The answer really depends on your financial situation.
If your finances aren’t in good shape or you think there’s a chance you could be laid off, it may be best to put off your home purchase. However, if you have a stable job and strong finances, you could save thousands by getting a mortgage now and taking advantage of low interest rates.
Understanding mortgage macro trends
In response to the coronavirus pandemic, the Federal Reserve slashed interest rates to 0% in March. This caused mortgage rates to hit all-time lows in the months following. Although the Federal Reserve doesn’t set mortgage rates directly, its decisions affect what kind of rates are available to borrowers. When the federal funds rate is low, lenders are able to borrow money cheaply and offer more competitive rates to their customers.
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Interest rates have bounced up and down for the past few months due to a variety of factors. Because interest rates fell so sharply, demand for mortgage refinancing increased, which drove rates back up temporarily. More recently, though, rates have fallen as investors move their money from stocks to bonds.
After the National Bureau of Economic Research announced that the U.S. has been in a recession, investors began looking for safer securities and turned to mortgage bonds. Mortgage rates tend to move in the opposite direction of bond prices, so as demand for bonds increases, mortgage rates fall.
The increased demand for bonds drove mortgage rates down even further. But how long will interest rates stay this way? Fannie Mae predicts that mortgage rates will hover near 3% for the rest of 2020 and may even fall to 2.9% in 2021. That means if you want to take advantage of record-low rates, you may not need to rush to refinance or purchase a home.
Factors to consider on top of mortgage macro trends
You may be wondering, “Can I get a mortgage?” Or “What if my credit isn’t great?” Although interest rates have fallen to historic lows over the past few months, you may not be able to secure a good mortgage rate if you have bad credit. Lenders determine your rate by looking at your individual financial situation. The best rates are only offered to borrowers with excellent credit, stable income, and sizable down payments. If your finances aren’t in order, lenders may view you as a risk and charge you a high interest rate, which could cost you thousands over the life of your mortgage loan.
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While it’s tempting to buy or refinance right now, taking some time to improve your finances before you apply for a loan could lead to even bigger savings. This includes:
- Improving your credit score — Your credit score is one of the main factors lenders consider when evaluating your application. Borrowers with credit scores of 740 or above usually qualify for the best rates. If your credit score isn’t there yet, you can boost it by paying your bills on time and reducing your debt.
- Reducing your debt-to-income ratio — Lenders also look at your debt-to-income ratio to see if you can handle taking on more debt. They generally like to see a DTI at or below 36%. If yours is higher, you may want to take some time to pay down your debt before you apply for a mortgage.
- Saving up a bigger down payment — Lenders view borrowers with bigger down payments as less of a risk, so try to save up as much as you can. Borrowers with down payments of 20% or more usually get the best rates.
It’s also important to figure out how much house you can afford so you ensure your payments and overall cost will be in your budget. Shopping around can also help you find the best rates. Interest rates can vary widely among lenders, so get at least a few quotes before you choose who to work with.
Getting a mortgage today
Because of the recession, lenders are tightening their requirements, which could make getting a mortgage more difficult. For example, Chase is now requiring borrowers to have a credit score of at least 700 and a down payment of 20% to qualify for its conventional loans. If you have below-average credit and minimal savings, you may not be able to get a mortgage.
If you’re in a strong financial position, however, now may still be a good time to buy. Many buyers are putting off house hunting until the pandemic is over, so you might face less competition if you buy a home now.
A recent report also found that 30% of lower-priced homes and 37% of higher-priced listings over $600,000 are being discounted to attract buyers. The median discount was about 7%, which is significant. Couple that with a low interest rate and you could save thousands on your home purchase.
However, if you think there’s a chance you could be laid off, it may be best to delay your home purchase. Lenders may be hesitant to approve borrowers who work in industries that get hit hard by recessions. In these instances, it’s best to wait until your employment situation is more stable before you purchase a home.
Too long, didn’t read?
If you have a good credit score and stable income, this may be a good time to buy a home to take advantage of record-low interest rates. However, if your finances aren’t in the best shape or you’ve lost income because of the pandemic, it’s probably best to hold off on your home purchase.
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