Mortgage rates have only shifted by a few basis points since last Friday, but they’ve gone down more significantly since this time last month. Rates are much lower than they were on January 1 last year.
If you want to get a mortgage soon, you may want to go with a fixed-rate mortgage rather than an adjustable-rate mortgage.
Mat Ishbia, CEO of United Wholesale Mortgage, told Business Insider there isn’t much of a reason to choose an ARM over a fixed rate right now.
ARM rates used to start lower than fixed rates, and there was a chance your rate could decrease later. But fixed rates are lower than adjustable rates these days, so you probably want to lock in a low rate while you can.
Rates from the Federal Reserve Bank of St. Louis.
Fixed mortgage rates haven’t changed much since last Friday, and adjustable rates have dropped by eight basis points. Mortgage rates have gone down in general since December 1.
Mortgage rates are at historic lows right now. The trend downward becomes more evident when you look at rates from six months ago or from the beginning of 2020.
Rates from the Federal Reserve Bank of St. Louis.
Lower rates are usually a sign of a struggling economy. As the US economy continues to grapple with the coronavirus pandemic, rates should remain low.
Rates from Bankrate.
All three mortgage refinance rates have decreased by a couple basis points since last week, and are down across the board since this time last month.
With a 30-year fixed mortgage, you’ll pay off your loan over 30 years, and your rate stays the same the whole time.
You’ll pay a higher interest rate on a 30-year fixed mortgage than on 15-year or 10-year fixed-rate mortgages. For a long time, you’d also pay a higher rate on a 30-year fixed loan than on a 5/1 ARM. But right now, 30-year fixed rates the better deal.
Monthly payments are lower for 30-year terms than for shorter terms, because you’re spreading payments out over a longer period of time.
You’ll pay more in interest in the long term with a 30-year term than you would for a shorter term, because a) the rate is higher, and b) you’ll be paying interest for longer.
With a 15-year fixed mortgage, you’ll pay down your loan over 15 years and pay the same rate for the entire life of the loan.
A 15-year mortgage costs less than a 30-year mortgage over the years. Shorter terms come with lower interest rates, and you’ll pay off the loan faster.
Your monthly payments will be more expensive for a 15-year term than for a 30-year term, though. You’re paying off the same loan principal in half the time, so you’ll pay more each month.
The 10-year fixed rates are comparable to 15-year fixed rates, but you’ll pay off your mortgage five years sooner.
A 10-year term isn’t very common for an initial mortgage, but you may refinance into a 10-year mortgage.
With an adjustable-rate mortgage, your rate stays the same for the first few years, then changes periodically. A 5/1 ARM locks in your rate for the first five years. Then your rate changes once per year for the remaining 25 years.
ARM rates are at all-time lows right now, but a fixed-rate mortgage is still the better deal. The 30-year fixed rates are comparable to or lower than ARM rates. It could be in your best interest to lock in a low rate with a 30-year or 15-year fixed-rate mortgage rather than risk your rate increasing later with an ARM.
If you’re considering an ARM, you should still ask your lender about what your individual rates would be if you chose a fixed-rate versus adjustable-rate mortgage.
It could be a great time to get a fixed-rate mortgage, but you don’t necessarily have to rush. Mortgage rates should stay low for the foreseeable future, so you probably have time to improve your finances. When you have a strong financial profile, lenders offer you lower rates.
To get the lowest mortgage rate possible, consider working to improve your finances. Here are some tips for securing a good mortgage rate:
- Increase your credit score. Be sure to make all your payments on time. You can also look into paying down more debts or letting your credit age. You may want to request a copy of your credit report to review your report for any errors that could be hurting your score.
- Save more for a down payment. Depending on which type of home loan you get, you may need between 0% and 20% for a down payment. But lenders offer lower rates to people who have bigger down payments. Because rates should stay low for a while, you likely have time to save more.
- Lower your debt-to-income ratio. Your DTI ratio is the amount you pay toward debts each month, divided by your gross monthly income. Many lenders want to see a DTI ratio of 36% or less (although it depends on the type of mortgage), but you’ll get a better rate with a lower ratio. To improve your ratio, pay down debts or consider opportunities to increase your income.
If your finances are in a good place, you could get a low mortgage rate now. But if not, you have plenty of time to make improvements to get a better rate.
Laura Grace Tarpley is the associate editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews.
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.