January is the best month to score the lowest mortgage rate, according to new research by financial technology firm Haus.com.
By taking a loan in January, you’ll pay a rate of 0.2 percentage point, or 20 basis points, less than if you take the same loan during the two priciest months, June and October. That’s according to Haus.com chief economist Ralph McLaughlin, who analyzed 8.5 million home loans bought by mortgage giant Freddie Mac from 2012 through 2019.
The patterns in mortgage rates mirror the seasonal ebbs and flows of home sales. In typical years, January is a slow month for home sales, while June is one of the busiest. Many buyers aim to move during the summer, when their kids are out of school.
“Just as there’s seasonality in home sales, there is pretty clear seasonality in mortgage rates,” McLaughlin says. “If you’re thinking of refinancing, it turns out that December, January and February are the best times to do it.”
In most years, sales slow around the holidays
The winter slowdown nudges lenders to drop rates to attract customers. December is the second-cheapest month to borrow — the average rate in December is just 2 basis points above January’s rate.
“To keep business going through the down season, lenders have to cut their rates a little bit,” McLaughlin says.
The gap rises to 12 points in March and stays in double digits through November, his research finds.
If you borrow $300,000 for 30 years, the payment difference between a rate of 2.8 percent and 3 percent amounts to $32 a month.
The seasonal differences are slightly more pronounced for purchase mortgages and cash-out refinances, and slightly less pronounced for traditional refinances, McLaughlin finds.
The premium for purchase mortgages rises to 21 basis points in June and October, while a cash-out refi costs 21 basis points more in October. However, the seasonal premium for a standard refinance tops out at 17 basis points in June.
Pandemic disrupts seasonal patterns
McLaughlin acknowledges that the seasonal trends in mortgage rates might not hold during the coronavirus pandemic. COVID-19 forced Americans to delay the spring selling season of 2020, but they picked up buying activity during the fall and winter. As a result, rates in January 2021 might not be as low as in normal years.
“We do think it’s probably going to be more muted than it has been in the past,” McLaughlin says.
McLaughlin isn’t urging buyers to run out and lock in a mortgage now. After all, timing is just one factor in determining your mortgage rate. Your credit score is the most important, followed by the size of your down payment.
“If you found a place that you like, and your credit score is in a decent spot and you have a down payment, now is a good time to get a good mortgage rate,” McLaughlin says.
On the other hand, if your credit score is below 700 and your down payment fund is meager, you’d be wiser to spend six months improving your credit score and building up your savings. Those factors will more than offset the premium you’ll pay by borrowing in the summer, he says.
Mortgage amount also matters
The size of your mortgage also affects your rate, McLaughlin finds. The sweet spot is a mortgage amount of $350,000 to $470,000, which comes with a discount of 23 basis points compared to loans of less than $100,000. Borrowing less than $350,000 means paying a small premium that climbs as the loan amount falls.
Small-dollar loans have long presented a conundrum for borrowers. Lenders tend to shy away from small mortgages, because they make less without a corresponding break in effort.
“To originate a $500,000 mortgage costs as much as to originate a $50,000 mortgage, even though the return is less,” he says.
What you can do to get a better mortgage rate
To secure the most favorable mortgage rate, take these steps:
Compare offers. Get offers from at least three lenders. If you live in an area with limited competition among local banks, that might require you to shop online.
Spruce up your credit score. It’s the best way to lower your rate, and more effective than boosting your down payment or improving your debt-to-income ratio. “Focus on your credit score first, because that’s going to give you the biggest bang for your buck,” McLaughlin says.
Boost your down payment. The more skin you have in the game, the less risk the lender is taking, and your rate will reflect that reality.