It May Seem Like a Really Good Time to Buy a House Right Now. But Here’s What You Should Know

updated Mar 19, 2020
We independently select these products—if you buy from one of our links, we may earn a commission. All prices were accurate at the time of publishing.
Post Image

In an emergency move intended to stimulate an economy battered by the coronavirus pandemic, the Federal Reserve cut its benchmark interest rates to nearly zero, which could potentially usher in even lower interest rates on mortgages.

Does that mean you—a prospective first-time homebuyer—should pounce on this chance to purchase a home? The short answer: Proceed with caution. A lot is at play in the economy right now, experts say, and you shouldn’t feel pressured to make a huge financial commitment, especially if you’re uncertain about your job security as the COVID-19 pandemic reshapes American life.

“It’s definitely not a once-in-a-generation opportunity to buy,” says Holden Lewis, home and mortgage expert at NerdWallet. “There will always be homes available to buy. It’s best to buy when you’re personally and professionally ready to settle down. Don’t buy a home now, just because mortgage rates are low.”

So, deep breaths. You don’t need to have major Black Friday-like FOMO if you’re being bombarded with information about interest rates being super low, yet you can’t reasonably afford to commit to what is likely the biggest financial decision of your life. However, if you are in a financially secure place with a healthy savings account that could weather a financial storm (and a big one, at that), buying a home now could be advantageous.

“The 30-year fixed mortgage rate hovers above 3 percent, the lowest that it has been in nearly 50 years,” explains Andrina Valdes, executive sales leader and CEO of Cornerstone Home Lending, Inc. “The lower the mortgage rate, the lower a monthly mortgage payment is likely to be. So, anyone who’s on the fence and thinking about buying a home could really benefit right now by purchasing at a record-low rate.”

Here’s what else you need to know about buying a home in today’s unprecedented landscape

The lowdown on interest rates right now

First things first: Potential homebuyers who are hearing the buzz about 0 to 0.25 percent interest rates should know that mortgage interest rates will likely never get that low. Rather, the federal funds rate is the rate that banks pay to borrow money overnight, and the feds have cut that rate twice in the past two weeks in an effort to stimulate the economy. The federal funds rate, though, does affect consumers, too, because banks typically extend lower rates, which can make for cheaper borrowing on everything from mortgages to student loans to credit cards.

However, mortgage rates have already been at, and near, historic lows. Existing homeowners have been taking advantage of those low rates, flooding lenders with refinance applications. As lenders work through a backlog of those applications, the 30-year fixed-rate mortgage actually ticked up from last week’s all-time low, according to Freddie Mac. The government-sponsored loan program’s March 12 report shows the current 30-year-fixed rate mortgage at 3.36 percent, which is up 0.07 from a week ago, but down almost a full percentage point from a year ago.

Let’s do the math, and for the sake of simplicity, not layer in expenses like Private Mortgage Insurance or taxes (you should budget for those important costs, but more on that later). If you have a 30-year-fixed rate mortgage at 3.36 percent on a $300,000 loan, your monthly payment would be $1,324. If rates were one percentage point higher, at 4.36 percent, your monthly payment on the same loan would be $1,495, or $171 more.

There’s something else first-time home buyers may overlook: The interest rates you see on the news might not be the specific rate you qualify for, says Guy Troxler, the chief loan officer for FedHome Loan Centers.

“A lot of things can impact your specific interest rate, such as your credit, income, the kind of home you’re buying, and the size of your down payment,” he says. So, although interest rates on 30-year-fixed mortgages are at 3.36 percent right now, you might not qualify for a rate that low.  

Patrick Boyaggi, the CEO of mortgage loan marketplace Own Up, explains that, yes, while interest rates are lower, mortgage underwriting standards remain high and in some cases are tightening, especially for many first-time homebuyers. This all makes it harder to secure the financing needed to buy a home. 

Buying a home in a time of social distancing

Another challenge first-time homebuyers may come across is low inventory, especially in the starter home market. On one hand, rates are low making payments more affordable, but fewer homes on the market could cause home prices to be a bit higher than normal, points out broker Mark Brace with Brace Homes by Berkshire Hathaway in Michigan. 

Yet with so many people social distancing and self-quarantining during the coronavirus outbreak, gatherings like open houses and showings will become less frequent. Those who don’t need to sell their homes right away may take their properties off the market for a while and see what happens, while those who need to sell immediately might drop prices, anticipates Christina Leavenworth, a realtor in Florida. 

This will not only affect home prices, but could ripple out to the vacation rental market. If travelers continue to cancel their plans, owners of vacation home rentals may have a tough time keeping up with their expenses and we might see those homes hit the market at lower prices, Leavenworth says.

“If prices do drop, in conjunction with record low interest rates, it may be that once-in-a-lifetime buying opportunity,” she says. “But right now, it’s just a wait-and-see game.”

And if a large number of buyers put off their house hunt for a few months, it’ll make this year’s once-busy spring market less competitive overall.  This is another fortunate sign for those who plan to stay the course.

Assessing financial stability

The coronavirus pandemic has undoubtedly caused a lot of financial anxiety, with more than half of American jobs at high or moderate risk, according to a Moody Analytics report cited by CNN. Americans are worried about reduced hours, layoffs, and their companies shutting down entirely.

The uncertainty of the financial markets is a contributing factor to the low mortgage rates we’re seeing, Troxler says. 

“It’s likely that mortgage rates will increase once the uncertainty over this pandemic has passed,” he says. “For example, after a vaccine is developed or after containment or treatment protocols are shown effective.”

When it comes to down payments, Boyaggi says buyers with at least 10 percent down are in a good position to consider buying a home. 

“However, if you are planning to use a low down payment loan program, you may want to wait to see how the housing market is impacted by COVID-19,” he says. “If you only put 3 percent down and housing prices depreciate by more than 3 percent, you can find yourself underwater. If you are purchasing your home for the long term—10-plus years—though, short term home price fluctuations become less of a factor.”

Even if you have a sense of job security amid the pandemic and a large down payment at the ready, there are some things you’ll want to consider when weighing if now is actually the right time to buy. Generally, housing costs—which include not just your mortgage, but also taxes, insurance, utilities, maintenance fees, homeowner’s association dues—should not exceed more than 35 percent of your take-home pay in order to feel most financially comfortable, says Certified Professional Planner Cynthia Meyer

“If you have good credit, chances are a mortgage lender will be willing to lend you more, but that doesn’t mean you have to borrow that much,” she says. 

Another tip from Meyer: Consider “house hacking” by buying a small, multi-family property, living in one unit and renting the rest. You could also rent out a spare room in your new home or condo, which may be easier for buyers who don’t have kids, and the extra income will help pay your mortgage and give you another income source during a recession.

To feel confident in your decision, it may be best to not just talk with a lender, but also to work with a financial planner to determine whether buying a house right now makes financial sense for your unique position.