Early 2021: a Great Time to Get a 30-year Fixed-Rate Mortgage

ChatGPT book banner

Five highlights from this report:

  • Early 2021 is a good time to take out a 30-year fixed-rate mortgage.
  • Interest rates are hovering below 3%, but they’re expected to rise.
  • Home prices are also expected to climb over the coming months.
  • Borrowers who delay could encounter higher costs down the road.
  • The 30-year fixed is currently a better deal than most ARM loans.

It’s a new year, and it brings a host of new questions from home buyers and mortgage shoppers. Is now a good time to buy a home? Will prices keep climbing? What are mortgage rates expected to do in 2021?

Over the next few days, we’ll be addressing these and other burning questions among home buyers in the U.S. Today, we’ll focus on one of the most common mortgage-related questions:

Is now a good time to use a 30-year fixed-rate loan?

Why 2021 Is a Good Time for a 30-year Fixed Mortgage

The short answer is yes, now is a great time to lock in for the long-term with a 30-year fixed mortgage. Rates are still very low, but they could start to rise. And there’s also the very real concern of paying more for a house, later on in 2021.

Here are the top-three reasons why now, early 2021, is a good time to use a 30-year fixed-rate mortgage to buy a home in the U.S.

1. Mortgage rates are still very low, but expected to rise.

During the first week of January 2021, the average rate for a 30-year fixed mortgage loan dropped to an all-time record low of 2.65%. That was the lowest weekly average in 50 years, according to the nationwide survey conducted by Freddie Mac.

Related: Mortgage industry trends in 2021

Borrowing costs are expected to rise as we move further into 2021. In fact, we just saw a recent uptick last week, when 30-year fixed mortgage rates rose to an average of 2.79%.

Maybe that’s just a short-term fluctuation. Maybe it’s the start of a sustained upward trend. We don’t yet know. But mortgage industry analysts do expect rates to be higher at the end of the year than they are right now.

When they published their survey results for the week of January 14, Freddie Mac’s researchers stated:

“While mortgage rates are expected to increase modestly in 2021, they will remain inarguably low, supporting homebuyer demand and leading to continued refinance activity. Borrowers are smart to take advantage of these low rates now and will certainly benefit as a result.”

This is the number-one reason why now, early 2021, is a good time to use a 30-year fixed-rate mortgage loan. Home buyers across the U.S. need to act with a sense of urgency, if they want to secure the very low interest rates we are seeing right now. Because they could begin to climb over the coming weeks and months.

2. The 30-year fixed is a better deal than the 5-year ARM.

Here’s another good reason to use a 30-year fixed mortgage when buying a home in 2021. You’ll probably get a better deal, compared to a short-term adjustable-rate mortgage (ARM) loan.

This is a fairly new development. Historically, adjustable mortgage products like the 3-year and 5-year ARM typically offered lower initial interest rates than the longer-term (and more popular) 30-year fixed. But that began to change earlier this year.

The chart below shows average mortgage rates over the past three years, based on Freddie Mac’s nationwide survey. The blue, green and reddish lines represent the average rate for a 30-year fixed mortgage, a 15-year fixed, and the 5-year ARM loan (respectively).

Chart with rates over three years
Average mortgage rates over the past three years

Pay particular attention to the blue and red lines. As you can see, those lines crossed in the latter part of 2020. That was when the average rate for a 30-year fixed mortgage in the U.S. sank below the 5-year ARM. A surprising development.

The bottom line here (pun intended) is that there’s little to no reason to use a 5-year ARM loan these days, and a very good reason to use a 30-year fixed-rate mortgage.

Current conditions give borrowers the opportunity to secure a very low interest rate while also locking in for the long-term to guard against interest rate hikes down the road.

But again, we don’t know how long these trends will last. The general consensus among industry analysts is that rates will rise gradually throughout the year. So chalk up another reason why early 2021 is a good time to use a 30-year fixed mortgage for a home purchase.

3. Home prices are still climbing in most U.S. cities.

House values in most U.S. cities rose steadily throughout 2020, despite the coronavirus pandemic and economic slowdown. And housing analysts expect more of the same in 2021.

By making a purchase sooner rather than later, home buyers have a chance to take advantage of lower mortgage rates and prices.

According to the real estate information company Zillow, the median home price in the United States rose by 7.5% over the past year. Looking forward, they predicted that prices would rise by around 10% over the next 12 months. (That forecast was issued in mid-January, so it basically covers calendar year 2021.)

In their 2021 Housing Forecast, published last month, Realtor.com’s researchers wrote:

“Amid COVID-19 uncertainty, 2021 will be a robust sellers market as home prices hit new highs (+5.7%) and buyer competition remains strong…”

If these and similar forecasts turn out to be true, home buyers in the U.S. could lose ground on two different fronts at the same time. Home buyers who postpone their purchases until later in 2021 might have to deal with higher home prices and higher mortgage rates. That could significantly reduce their purchasing power.

So there you have them, three good reasons why early 2021 is a great time to get a 30-year fixed-rate mortgage loan. You could take advantage of historically low interest rates while avoiding higher home prices at the same time. Those who wait longer, on the other hand, will likely pay a price for it.

Disclaimer: This article induces home prices and mortgage rate forecasts issued from third-party sources not associated with the publisher. HBI makes no claims or assertions about future real estate / economic conditions.