Today's best mortgage and refinance rates: Thursday, December 31, 2020

Mortgage rates haven't changed dramatically since last Thursday, but they have trended downward since this time last month. Rates are at historic lows in general, so it could be a good day to buy a home or refinance.

If you want to get a mortgage soon, you may want to go with a fixed-rate mortgage rather than an adjustable-rate mortgage.

Darrin English, Senior Community Development Loan Officer at Quontic Bank, told Business Insider there used to be an advantage to an adjustable-rate mortgage, in which the rate fluctuates after an initial period. That advantage was usually a lower rate for the fixed period.

However, he pointed out that ARM rates haven't been following that trend in recent months. Right now, fixed rates are lower, and you can lock in a super low rate for the entire life of your loan without risking an increase later.

Mortgage rates on Thursday, December 31, 2020

Mortgage typeAverage rate todayAverage rate last weekAverage rate last month
30-year fixed2.66%2.67%2.72%
15-year fixed2.19%2.21%2.28%
5/1 ARM2.79%2.79%3.16%

Rates from the Federal Reserve Bank of St. Louis.

Fixed mortgage rates have dipped slightly since last Thursday, but adjustable rates have stayed the same. Mortgage rates have decreased overall since the end of November.

Mortgage rates are at historic lows right now. The trend downward becomes more evident when you look at rates from six months or a year ago:

Mortgage typeAverage rate todayAverage rate 6 months agoAverage rate 1 year ago
30-year fixed2.66%3.13%3.74%
15-year fixed2.19%2.59%3.19%
5/1 ARM2.79%3.08%3.45%

Rates from the Federal Reserve Bank of St. Louis.

Lower rates are usually a sign of a struggling economy. As the US economy continues to grapple with the coronavirus pandemic, rates will probably stay low.

Refinance rates on Thursday, December 31, 2020

Mortgage typeAverage rate todayAverage rate last weekAverage rate last month
30-year fixed2.93%2.97%3.08%
15-year fixed2.40%2.41%2.52%
10-year fixed2.42%2.41%2.53%

Rates from Bankrate.

Mortgage refinance rates have only shifted by a couple basis points since last Thursday, and they've decreased by a little more since this time last month.

How do 30-year fixed mortgage rates work?

With a 30-year fixed mortgage, you'll pay off your loan over 30 years, and your rate stays the same the whole time.

A 30-year fixed mortgage charges a higher interest rate than a mortgage with a shorter term. The 30-year fixed rates used to be higher than adjustable rates, but 30-year terms have become more affordable in recent months.

Your monthly payments will be lower on a 30-year mortgage than on a shorter-term mortgage, because you're spreading payments out over a longer period of time.

However, you'll pay more in interest with a 30-year mortgage than you would for a 15-year mortgage, because a) the interest rate is higher, and b) you'll be paying interest for longer.

How do 15-year fixed mortgage rates work?

With a 15-year fixed mortgage, you'll pay down your loan over 15 years and pay the same rate for the entire life of the loan.

You'll pay less for a 15-year mortgage than a 30-year mortgage in the long run. A 15-year term charges a lower interest rate, and you'll pay off your mortgage in half the time.

However, your monthly payments will be higher on a 15-year term than on a 30-year term. You're paying off the same loan principal in a shorter amount of time, so you'll pay more each month.

How do 10-year fixed mortgage rates work?

A 10-year fixed-rate mortgage isn't very common for an original mortgage. But you might refinance into a 10-year mortgage later.

Rates are similar to what you'll pay for a 15-year fixed-rate mortgage, but you'll pay off your mortgage five years earlier.

How do 5/1 adjustable mortgage rates work?

With an adjustable-rate loan, your rate stays the same for the first few years, then changes periodically. A 5/1 ARM locks in your rate for the first five years. Then your rate changes once per year for the remaining 25 years.

A 5/1 ARM rate is higher than a 30-year or 15-year fixed rate right now. In the past, ARM rates have been lower, but that isn't the case in recent weeks. This means ARMs cost more than they used to, and are therefore less beneficial.

If you're considering an ARM, then you should still ask your lender about what your individual rates would be if you chose a fixed-rate versus adjustable-rate mortgage.

Ways to get a better mortgage rate

It may be a good time to get a mortgage, but you don't necessarily need to rush. Mortgage rates should stay low well into 2021 (if not longer), so you can still take advantage of low rates even if you don't act immediately.

To get the lowest mortgage rate possible, consider working to improve your finances. Here are some tips for securing a good mortgage rate:

  • Boost your credit score. Be sure to make all your payments on time. You can also look into paying down more debts or letting your credit age. You may want to request a copy of your credit report to review your report for any errors that could be hurting your score.
  • Save more for a down payment. Depending on which type of home loan you get, you may need between 0% and 20% for a down payment. But lenders typically offer better rates to people who have bigger down payments. Because rates should stay low for a while, you probably have time to save more.
  • Lower your debt-to-income ratio. Your DTI ratio is the amount you pay toward debts each month, divided by your gross monthly income. Many lenders want to see a DTI ratio of 36% or less (although it depends on the type of mortgage), but you'll get a better rate with a lower ratio. To improve your ratio, pay down debts or consider opportunities to increase your income.

If your finances are in a good place, you could lock in a low mortgage rate today. But if not, you have plenty of time to make improvements to get a better rate.

Laura Grace Tarpley is the associate editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews.

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