Mortgage Rates Will Likely Stay Low for Years. Here's Why

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Here's some potential good news for prospective homebuyers.

The summer of 2020 has, for many people, been the summer of quarantine. But it's also been the summer of historically low mortgage rates. In early August, the average interest rate on the 30-year fixed mortgage fell to 2.88% and has since hovered at close to 3%. Meanwhile, the average interest rate on the 15-year mortgage hit a low of 2.44% about a month ago, and since then it's stayed close to the 2.5% mark.

As a result, many prospective buyers have rushed to apply for mortgages so they can capitalize on these remarkably low rates. But a recent update from the Federal Reserve indicates that low mortgage rates may be with us for quite some time.

What's in store for mortgage rates?

On Aug. 27, Federal Reserve Chair Jerome H. Powell stated that in all likelihood it will take a long time to recover from the recession the COVID-19 pandemic has caused. For that reason, interest rates will likely stay low until that recovery is complete.

Now to be clear, just because the Federal Reserve controls interest rates, it doesn't mean it has the same power over mortgage rates. In fact, mortgage rates are determined by supply and demand in a secondary market in which the Federal Reserve gets no say at all. But the Federal Reserve's policy can still influence mortgage rates, and that's what's been happening this summer. In fact, mortgage rates tend to follow the yield for 10-year U.S. Treasury bonds, which is at 0.68% as of this writing -- well below its long-term average of 4.43%.

What's noteworthy about Powell's statement, however, is the indication that the Federal Reserve will be keeping the status quo for quite some time, thereby giving homebuyers an extended opportunity to secure a low mortgage. Now to be clear, this doesn't mean mortgage rates will drop much lower than where they're at today. But it could mean that buyers will have more time to take advantage of these historically low rates.

Current homeowners stand to benefit, too. Low mortgage rates also apply to refinances, so those looking to swap an existing home loan for a new one may not need to rush to make that happen immediately. That said, because of a new refinancing fee that's currently set to kick in in December, it actually does pay to get moving on a refinance application.

Should you buy a home now, or wait?

Mortgage rates may be extremely attractive at the moment, but the housing market doesn't have a lot of inventory to offer. As such, those attempting to buy right now are grappling with limited choices, inflated asking prices, and bidding wars.

If you're eager to buy a home so you can capitalize on today's low mortgage rates, it could actually pay to sit tight for a little while, especially in light of the above. There's a good chance the housing market will open up some more come 2021, and if that happens, higher supply will lead to lower demand, thereby driving home prices down.

The result? You might manage to score a great price on a home and lock in a competitive mortgage rate. Right now, you may have to compromise on the former in order to snag the latter.

Our Research Expert

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