If you've dreamed of owning a home, now might just be the perfect time to make it happen. Interest rates have reached record lows this past year due to the COVID-19 pandemic: The current average rate is 3.25 percent for a fixed 30-year mortgage, with some first time programs as low as 2.9 percent.
Because of the economic impact of COVID, interest rates were dropped over 1 percent by the federal government from what they were pre-pandemic. "Interest rates are a big factor on what a buyer's payment will be for a certain loan amount," says Elias Papadopoulos, a Massachusetts-based broker at Re/Max Unlimited. "The lower the rate, the lower the payment," Papadopoulos adds.
But the numbers might not stay that way for long—with vaccines rolling out and people getting back to work, experts say interest rates will continue to rise through 2021 as the economy starts to recover. "Rates should remain stable until the end of this year, but we always have to remember that it depends on supply and demand, so there is a chance they could go up sooner," says Papadopoulos.
Real estate investing and homeownership are important ways to create wealth. If you're a first-time homebuyer, these low interest rates could save you a lot of money. "We're seeing a lot of activity from first-time home buyers taking advantage of low interest rates to pursue their dream of homeownership," says Ziggy Jonsson, head of financial products at digital homeownership company Better. "There is a historic opportunity to lock in a low interest rate mortgage and save thousands."
Whether you're already a homeowner—or looking to be someday—here are ways to get the best interest rate and save money on your mortgage.
Make sure you have a strong credit score.
Having good credit is really important when you're trying to get the lowest interest rate on a mortgage. "The best deals go to borrowers with scores of 740 or higher," says Jeff Ostrowski, real estate analyst at Bankrate.
Your credit score will help lenders figure out whether you're a responsible borrower and how you pay back loans based on your borrowing history. The higher your credit score, the higher your chances are of getting a better interest rate, which could lead to "thousands of dollars in savings over the life of your mortgage," according to Jonsson.
A strong credit score is also important to get a good price on mortgage insurance, which you will need if you make a downpayment that is less than 20 percent. Jonsson also recommends getting a free copy of your credit score to make sure there are no mistakes—these can take credit bureaus weeks or months to fix.
Have a low debt-to-income ratio (DTI).
Your debt-to-income ratio, or DTI, is all of your monthly debt payments divided by your gross monthly income. Having a low DTI will make you eligible for more financing options and help you save more money on your mortgage over time. "If you have some flexibility in your purchase timeline, consider taking the time to lower your DTI," recommends Jonsson.
Some ways to lower your DTI are paying off a car loan before applying for your mortgage, holding off on major expenses until after you have bought your home, and paying off any credit card debt.
Shop around for lenders.
Don't just settle for the first rate you find. Do your research and shop around—Ostrowski advises getting at least three to five offers before making a decision. "Rates and closing costs can vary widely from one lender to the next," says Ostrowski. "Comparison shopping can save you thousands of dollars over the life of the loan.”
Jonsson says one of the biggest mistakes home-buyers make is going with the lender that their real estate agent recommends. Make sure you do your homework so you know you're getting the best interest rate.
Consider refinancing your home.
If you already own a home, use these low interest rates to consider refinancing your mortgage. Reducing the interest on your current mortgage can help you save a lot of money in the future. "You can then also use the extra savings to pay down additional principal and cut years off your mortgage, which will also save you a ton in future interest," says Sophia Weeks, associate at Re/Max Synergy.
The general rule for refinancing? If you are able to lower your interest rate by at least 0.5 percent, you should take that opportunity. "The best way to find out if a refinance makes sense for your personal financial situation is to take a look at today’s rates to see how they stack up with your current loan," says Jonsson. He says homeowners who first financed their homes in February 2020 or earlier are most likely to save.
The bottom line
If you're looking to invest in real estate, buy your first home, or refinance your mortgage, now is the time to do it. "Most buyers can purchase a home and actually pay less monthly than what they were paying for rent—and enjoy the tax benefits," says Weeks.
Remember that interest rates tend to fluctuate, so timing is key. Do your research, look at your finances, and see what options are available to you; your dream home might be right around the corner.