Mortgage Rates Hit a New Record Low in January

We're kicking off 2021 with some pretty amazing mortgage rates. Here's what you need to know.

Mortgage rates have been very competitive since summertime, and they keep inching lower. The average interest rate on a 30-year fixed loan is now 2.65%, according to Freddie Mac. That's the lowest level in nearly 50 years. Meanwhile, the average 15-year fixed loan fell to 2.16%. Currently, rates are roughly a full percentage point lower than where they stood a year ago.

All that means you may be tempted to apply for a mortgage. But is now really the right time?

Should you try to buy a home today?

If you buy a home today and your credit score is great, there's a good chance you'll lock in a low mortgage rate that results in affordable monthly payments over the term of your loan. But while today's mortgage rates are a really good deal, today's home prices aren't.

Home prices climbed substantially last year. In November 2020, the median price of a home sold was $310,800, a 14.6% hike compared to November 2019. As a result, what you save in the form of a low mortgage rate you might more than make up for with a higher home price.

Also, because home prices are so high, you might struggle to come up with a 20% down payment on a property you buy. If that's the case, you'll get stuck with private mortgage insurance (PMI). PMI is a premium that's generally tacked onto your monthly mortgage payment -- and it can amount to up to 1% of your loan amount. If you borrow $200,000, that means you could pay an extra $2,000 a year simply for not having 20% to put down at closing.

Another thing to consider is that housing inventory is very low right now. You may not find a home you want within your budget -- or a home you can afford that also checks off the boxes on your list. You may, for example, need a four-bedroom property to accommodate your family, but if there are only a handful of homes for sale in the neighborhood you want to buy in, you may have to settle for a three-bedroom instead. That could make daily life a lot less comfortable once you move in.

Of course, if you find a home that suits your needs, offered at a price point you can afford, then it certainly pays to move forward given today's mortgage rates. If you're house-hunting, do what you can to make yourself the most appealing loan candidate possible. That includes:

• Paying down debt to boost your credit score and lower your debt-to-income ratio.
• Checking your credit report for errors that work against you, like a delinquent debt you've since settled.
• Boosting your cash reserves to make a higher down payment or have more assets to show a lender (the more money you have, the more comfortable a lender will be giving you a loan).

Remember, top rates are only available to mortgage applicants with strong credit and solid finances. If you want to take advantage of these rates, make yourself the most qualified candidate you can be.