Today's best mortgage and refinance rates: Tuesday, January 5, 2021

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Mortgage rates have decreased since last Tuesday, with the exception of 30-year fixed-rate mortgages, which have increased by only one basis point. Refinance rates are down across the board since last week.

Whether you want to get an initial mortgage or refinance, you'll probably want to go with a fixed-rate mortgage instead of an adjustable-rate mortgage.

Mat Ishbia, CEO of United Wholesale Mortgage, told Business Insider there isn't much of a reason to choose an ARM over a fixed rate right now.

ARM rates used to start lower than fixed rates for the first few years, and there was a chance your rate could decrease later. But fixed rates are lower than adjustable rates these days, so it could be good to lock in a low rate while you can.

Today's mortgage rates: Tuesday, January 5, 2021

Rates from the Federal Reserve Bank of St. Louis.

The 30-year fixed mortgage rates are up by one basis point since last Tuesday. The 15-year fixed rates are down by two basis points, and 5/1 adjustable rates are down by eight basis points. Mortgage rates have decreased overall since this time last month.

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

Rates from the Federal Reserve Bank of St. Louis.

Lower rates are typically a sign of a struggling economy. As the US economy continues to grapple with the COVID-19 pandemic, rates will likely stay low.

Today's refinance rates: Tuesday, January 5, 2021

Rates from Bankrate.

Mortgage refinance rates have decreased by two or three basis points since last Tuesday, and by a little more since this time last month.

How a 30-year fixed-rate mortgage works

With a 30-year fixed-rate mortgage, you pay off your loan over 30 years, and your rate remains the same the entire time.

A 30-year fixed mortgage comes with a higher interest rate than fixed-rate loans with shorter terms. For a long time, 30-year fixed rates were higher than adjustable rates. But right now, 30-year fixed rates the better deal.

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

You'll pay more in interest with a 30-year term than you would for a 15-year or 10-year mortgage, because a) the rate is higher, and b) you'll be paying interest for longer.

How a 15-year fixed-rate mortgage works

With a 15-year fixed term, you'll pay down your mortgage over 15 years, and your rate is locked in for the entire time.

A 15-year fixed-rate term is more affordable than a 30-year term in the long run. The 15-year rates are lower, and you'll pay off the mortgage 15 years earlier.

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

How a 10-year fixed-rate mortgage works

A 10-year term isn't very common for an initial mortgage, but you may refinance into a 10-year fixed mortgage.

The 10-year rates are similar to 15-year rates, but you'll pay off the mortgage in a shorter amount of time.

How a 5/1 ARM works

An adjustable-rate mortgage, often referred to as an ARM, keeps your rate the same for the first few years, then changes it periodically. A 5/1 ARM locks in your rate for the first five years, then your rate will fluctuate once per year.

Although ARM rates are relatively low these days, you still may want to go with a fixed-rate mortgage. The 30-year fixed rates are comparable to or lower than ARM rates, so it could be good to lock in a low rate with a fixed mortgage rather than risk your rate going up later with an ARM.

If you're considering an ARM, 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 lower mortgage rate

Fixed mortgage rates are at historic lows right now, so it could be a good time to lock in a low rate. 

You might not need to rush to take advantage of low rates, though. Mortgage rates will probably stay low well into 2021 (if not longer), so you have time to improve your financial situation if necessary — which will help you snag a lower rate. Here are some ways to get a better mortgage rate:

• Increase your credit score by paying down high-interest debt and making payments on time. A score of at least 700 will help you out — but the higher, the better.
• Save more for a down payment. You don't always need a 20% down payment to get a good rate, but lenders typically reward higher down payments with lower rates. If you don't have much for a down payment right now, it could be worth saving for a few more months. 
• Lower your debt-to-income ratio. Your debt-to-income ratio is the amount you pay toward debts each month, divided by your gross monthly income. Lenders want to see a debt-to-income ratio of 36% or less. Consider paying down some debts, such as credit cards or a car loan, to get a lower ratio.

If your finances are strong, you could get a good 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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