The U.S. housing market started off strong going into 2020. Before the COVID-19 pandemic hit, it was typically the best time of the year for sellers to list a home for sale. However, with shutdowns and stay-at-home mandates, the housing inventory was never able to recover as buyers returned to the real estate market.
As Americans started to have more freedom and flexibility with remote working conditions, combined with low mortgage rates, real estate demand grew with limited supply — creating a lighting-fast seller’s market. The housing market out-performed every other economic sector across the nation.
With mortgage rates at all-time lows, it might feel like the best time to buy a second home but it won’t be as simple as you may think.
Consider refinancing your current home mortgage first
Before you start shopping for a second home, first consider refinancing your current home mortgage. With the current lower interest rates, now might be the best time to lock in a good rate before they start to rise again.
If your goal is to reduce your monthly mortgage payment or save money, you’ll need to use an online mortgage refinance calculator to determine if refinancing your current home is a good option. You can also head to Credible to crunch the numbers and determine your estimated monthly payments and more.
Refinancing your current mortgage can potentially provide one or more of the following benefits:
- A better mortgage rate
- A lower monthly mortgage payment
- A shorter mortgage term
- Cash-out refinance
1. A better mortgage rate
A better mortgage rate could mean substantial savings. A 1.0% rate deduction on a $200,000 home with a $160,000 mortgage saves you $100 a month. This might not seem like much but on a 30-year term, this saves you $30,000 in interest.
2. A lower monthly mortgage payment
A lower rate can lower your monthly payments and put you in a better financial position. If you’re paying less in interest, you have more money to work with each month. That extra cash could be put to better use in a retirement account or towards another long-term financial goal.
To see how much you could save on monthly payments today, crunch the numbers and compare rates and mortgage lenders using Credible's free online tool. You can also use a refinance calculator to help figure out how a new home loan will impact your personal financial situation.
3. A shorter mortgage term
Many buyers purchase a home with a 30-year mortgage loan and choose to refinance to a 15-year fixed-rate mortgage. If you have 20 years left on your mortgage and refinance into a 15-year mortgage, the lower interest rate and the shorter term will greatly reduce the amount you pay in interest.
4. Cash-out refinance
You can borrow money against your home equity with a cash-out refinance. This can be a cost-effective option if you need to borrow.
If you’re thinking of refinancing, consider using Credible. You can use Credible's free online tool to easily compare multiple mortgage lenders and see prequalified rates in as little as three minutes without impacting your credit score.
The pros and cons of purchasing a second home in 2021
This past year has been unique, to say the least. Although millions of Americans are taking advantage of the low interest rates, buying a home in 2021 has its pros and cons.
First, these mortgage rates won’t stay low forever but there’s a good chance they’ll remain low for the remainder of the year. Lawrence Yun, chief economist with the National Association of Realtors, believes that mortgage rates will remain stable with a slight increase for 30-year fixed-rate mortgages. The Federal Reserve has also indicated that this low interest rate policy will remain for a long period of time.
Low mortgage rates mean you pay less in interest over the term of the loan. With these rates, borrowers can save a considerable amount of money.
However, the current housing market has been a challenge for buyers. A hot seller’s market means increased competition due to a low housing inventory. As buyers duke it out in bidding wars, it means putting in higher offers to beat out the competition.
Redfin, a Seattle-based real estate brokerage, reported national median home prices hit a new record of $320,625, which is a 15% increase year-over-year. Combined with low mortgage rates, it might not seem like a bad deal but you may not make the return on your investment if or when you decide to sell.
Another potential obstacle for borrowers is that mortgage lenders have become pickier. Because of the economic impact of job loss from COVID-19, many lenders have changed home loan requirements and the borrower evaluation process to mitigate the increased risk of default and late payment. Borrowers with lower credit scores might have a more difficult time securing financing when looking to purchase a home.
Have mortgage questions? Visit Credible to get in touch with experienced loan officers and get your mortgage questions answered.
The bottom line
The low mortgage rates are enticing but buying a second home in 2021 will be a challenge and buyers need to be prepared. Before applying for a mortgage, make sure you shop around first. Explore your options by visiting Credible to compare rates and mortgage lenders without impacting your credit score. And as you’re considering your budget, you should use an online mortgage calculator to determine potential monthly mortgage payments.