Why Mortgage Rates Could Go Even Lower

Mortgage rates are already unbelievably low. But will they keep dropping?

The summer of 2020 has been the summer of low mortgage rates. In mid-July, the average rate for a 30-year fixed mortgage dropped to 2.98%. That was a record at the time. Then, in early August, the 30-year mortgage reached a new record low of 2.88%. And just when we thought rates couldn't get any better, lo and behold, September brought about another record -- this time 2.86% for the 30-year loan.

Clearly, these astonishingly low rates are worth capitalizing on. Or are they? Some borrowers may want to lock in a mortgage immediately, but the reality is that rates could actually keep getting lower. Here are a few reasons why.

1. The Federal Reserve plans to keep interest rates low

The Federal Reserve doesn't control mortgage rates -- but it does control interest rates. And mortgage rates tend to follow the yield for the 10-year U.S. Treasury bond, which, as of writing, is 0.69%. That's well below its average 4.43% yield. Meanwhile, the Fed has pledged to keep interest rates low for quite some time, and that, in turn, could drive mortgage rates even lower.

2. The economy might stay sluggish well into 2021

Economic indicators like gross domestic product and the unemployment rate can also influence the way mortgage rates fluctuate. Right now, the U.S. economy is in a recession. The jobless rate may have gradually decreased since its record 14.7% high in April, but it's still worlds higher than it was before the coronavirus pandemic began. And if the economy weakens further, which could happen as we get into winter, we could see rates drop as a result. The concern is that the confluence of flu and COVID-19 could drive consumers to steer clear of stores, resulting in a widespread reduction in spending.

3. Housing inventory is very low

Mortgage rates are often a function of supply and demand. When there are a lot of new homes on the market and buyers start to clamor for them, the demand for mortgages goes up. When there's less inventory, demand wanes, which can push interest rates downward. In June of 2020, there were 18.2% fewer homes available for purchase than the year before, as per the National Association of Realtors®. And inventory has remained sluggish since. As we head into winter, which is historically a less popular time to list homes on the market, we may see inventory drop even further, which could, in turn, drive mortgages rates downward.

Should you hold out for a better mortgage rate or apply now?

Let's be clear: It's possible mortgage rates will fall in the coming months, but there's no guarantee it will actually happen. As such, it could pay to apply for a home loan now, while the average 30-year mortgage is still below 3%.

Remember, too, that if positive news emerges on the COVID-19 vaccine development front, it could spur an uptick in spending that hastens our economic recovery. That would limit the chances of mortgage rates dropping further. Clearly a vaccine would be a good thing, but the point is that it's a bit of a gamble to wait when rates are already so competitive. If you have found a property at the right price and are able to qualify for the current low rates, you may be better off locking in a sure thing now.