Why Buying a Home May Not Be Cheaper with Rates at Historic Lows

by Maurie Backman | Updated July 19, 2021 - First published on Aug. 6, 2020

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A man unpacking moving boxes in his new home.

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Higher home prices make low mortgage rates less of a draw.

It pays to buy a home when mortgage rates are low, because the lower the rate you lock in, the less you spend on housing payments over time. And right now, mortgage rates are ridiculously low. For much of July, the average rate for a 30-year fixed mortgage hovered a little above 3%, and in mid-July, it actually dipped below 3% for the first time ever. Meanwhile, you can still snag a 15-year fixed mortgage at well under 3%, and while that will give you a higher monthly payment than you'd get with a 30-year loan, it also means you'll pay less interest over the life of your loan.

But despite today's low mortgage rates, buying a home in the coming weeks may not be such a bargain. Here's why.

Low inventory is driving home prices up

A lot of potential sellers are holding off on listing their homes during the COVID-19 crisis. The result? There's less inventory to choose from. That means buyers often have to outbid each other, not to mention pay a premium for the limited supply of properties that are available.

In fact, the Federal Housing Finance Agency reports that home prices rose 4.9% between May 2019 and May 2020. At the same time, the number of home purchase transactions was 30% less in May 2020 than the year before, which explains why sellers have been forced into paying top dollar to capitalize on today's mortgage rates.

Should you buy a home today?

Tempting as it may be to buy a home right now to make the most of today's mortgage rates, the savings you reap by locking in a lower mortgage could be offset by a higher price tag for your home. A better bet, therefore, may be to wait things out a little and see if housing inventory opens up during the latter part of 2020. Mortgage lenders were offering particularly competitive rates in July, but they've actually been low the entire year, historically speaking, so there's a good chance they'll stay attractive during the latter part of 2020 as well.

Of course, whether now's the right time to buy a home should also boil down to your personal financial situation. Before you even think about buying, you should ask yourself:

  • How's my credit score? If your credit score is not all that great, you won't qualify for the best mortgage rates out there anyway, in which case it could pay to wait and work on boosting your score.
  • How much debt do I already have? If you're loaded up on credit card payments and other loans, you may want to hold off on taking on more debt. Though mortgage debt is considered a healthy kind of debt to have, at the end of the day, it still obligates you for another monthly payment you may not be in the best position to afford.
  • How steady is my job? Many jobs are at risk due to the ongoing recession. If you work in an industry that's been hard-hit by the pandemic, like hospitality or entertainment, then now probably isn't a good time to commit yourself to a mortgage.
  • What does my savings account look like? If you're thinking of buying a place of your own, make sure you have enough money for a down payment (a potentially higher-priced one at that), and that you also have enough money left over for emergencies.

You might break even

If you manage to lock in a competitive mortgage rate today, any savings you make may be canceled out by a higher purchase price. Ultimately, that may not be a terrible thing, as it means you'll break even. But if your goal in buying right now is to score a cheap home, then just be aware that you may not get what you want.

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