by Maurie Backman | Aug. 19, 2020
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Mortgage rates have plunged, but that doesn't necessarily make now a good time to buy.
There's a reason homebuyers are clamoring to snatch up homes these days, despite that we're deep in the throes of a pandemic: Mortgage rates have hit historic lows, which means you have a big opportunity to lower your housing costs over the long term.
On August 6, the 30-year fixed mortgage averaged just 2.88%. For context, a 30-year mortgage under 4% is considered quite competitive, so to lock in a mortgage of that length at under 3% is phenomenal. But before you rush to take advantage of today's incredible mortgage rates, one thing you should know is that there's not a lot of inventory on the housing market. That means you could end up getting a good deal on a new home, just maybe not the right home.
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Though mortgage rates are extremely competitive right now, home prices are not. In fact, in May of 2020, home prices were close to 5% higher than they were a year before, according to the Federal Housing Finance Agency. That's primarily because inventory is limited, thanks to many potential sellers holding off on listing their properties.
Limited inventory on the housing market doesn't just mean that you, as a buyer, might get stuck paying more for a home. It also means you may have to settle for a home that isn't all that great.
Say your target neighborhood would normally have 30 to 40 homes listed at this time of year within your price range, but because of the tight market, you only have 12 homes to choose from right now. Some of those homes may not be in the best shape. Others might be too small for your needs. And some might be updated and have decent square footage, but lack the features you really want, like, say, an open floor plan, an updated kitchen, or a built-in master bathroom.
That's why now isn't necessarily the best time to buy a home, despite such appealing mortgage rates. And if you settle for a home that isn't really what you want, you could wind up regretting it -- especially if you're forced to pay a premium for that property.
In fact, say that by locking in a mortgage today, your monthly housing payments are $200 lower than what they'd normally be. That's a significant amount. But what if you're also forced to buy a home that needs serious work, solely in order to close on a mortgage now? You might have to sink $20,000 of repairs into that home to make it livable. Suddenly, you've just cost yourself 100 months' worth of savings -- and you've taken on the hassle of renovating.
Tempting as it may be to lock in a mortgage today, make sure you're doing so for the right home. If you find a great home at a reasonable price and you qualify for a really low mortgage rate (which is possible if your credit score is excellent), then it certainly makes sense to move forward with a purchase. But don't push yourself to buy any old home just to lock in a competitive mortgage. If you do, you might negate your mortgage savings and wind up stuck in a home you don't love.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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