Buying a home right now is unique in two big ways. Mortgage interest rates started sinking with the rise of coronavirus cases and have been on a downward trend ever since. Borrowers keen to strike while the iron is hot are enjoying an unprecedented period of low interest rates. No wonder refinancing is up 192% according to the Mortgage Bankers Association.

Mortgage rates aren't the only thing dropping to the floor. The number of homes on the market has dropped to a historic low per many analyses, such as the one by Black Knight's Collateral Analytics. This is not entirely due to the virus. Forbes saw the writing on the wall back in December 2019. But COVID hasn't helped matters. Aside from a reluctance among homeowners to sell and relocate during uncertain times, another reason that homes are not going on the market is that a dearth of supplies and contractors¹ is keeping repairs from being made and thus keeping homes from being listed.

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Despite the unique landscape of homebuying right now, first-time buyers can benefit from the good advice of those who have gone before them.

What mistakes are common among first-time homebuyers, and how can you avoid them?

They Didn't Know How Much They Could Afford

First-time buyers tend to have a better idea of the kind of home they want than what their budget is. After all, looking at available homes is the fun part; the money part can be a splash of cold water.

A good way to evaluate your budget is to use a mortgage calculator, where you enter an interest rate, a down payment, and the length of the loan to estimate a monthly payment. But don't stop there; look for the calculator's advanced options, which estimate homeowner's insurance, property tax, and more.

First-time buyers who didn't have a clear picture of what they could afford wasted time looking at homes beyond their reach. Worse, some overspent on their first home and soon regretted it.

For a great example of how a little amount of money can make a big difference in homebuying, look at how just $100 extra paid on the principal each month cuts years off the loan and saves you big money in interest. When negotiating monthly payments with a lender, keep $100 in mind always. Sign on for a payment that will leave you that much extra to pay on the principal only.

$200,000 home loan at 4.5% APR. Monthly payment $1,013.
Minimum ($1,013) every month 30 years $164,183 $0
$100 extra every month 25 years $133,068 $31,745

No need to mention "the $100 trick" in your negotiations. Just keep it in mind privately. Do make sure that the lenders you consider will not penalize you for making principal-only extra payments. Steer clear of lenders who do.

The surprising effect of $100 extra

They Didn't Shop for the Best Loan

Nearly half of homebuyers go with their first mortgage offer. They rely on the relationship they have with a bank, or go with a referral from a friend or a real estate agent, and don't shop around. Comparing has never been easier, with free personalized rate finders like

Freddie Mac's research indicates that borrowers could save $1,500 over the life of the loan by getting just one more quote and about $3,000 by getting five quotes.

Homebuyers can also benefit by shopping for the lowest fees, in addition to the lowest rates. Researchers Susan Woodward and Robert Hall documented that variations in consumer mortgage searches led to large differences in broker fees. By not shopping effectively, typical borrowers paid $1,000 more in broker fees charged to originate their mortgage.

Lenders who respond to a weekly survey conducted by Bankrate give us a good snapshot of current rates on different loan products. Average rates for September 2020:

Average Mortgage Interest Rates for Sept. 2020
30-year fixed rate 2.96% 3.09%
30-year FHA rate 2.92% 3.61%
30-year VA rate 2.94% 3.14%
15-year fixed rate 2.51% 2.64%

They Ignored Their Credit Report

We are not talking about credit score. Most people know their score, and score definitely matters. But your credit report could contain errors that have lowered your score.

When it comes to score, you'll want a score of at least 650 if you want a traditional home loan (700 or higher is preferred). People with lower scores could qualify for a government-backed loan. According to the Federal Reserve, 90% of buyers in the first quarter of 2020 had a score of at least 660, a bit higher threshold than the year before. Meanwhile, 75% of buyers had a score of 700 or more.

Thanks to COVID-19, checking your credit report frequently is free (it used to be free once a year). Go directly to the one-and-only government agency for your reports, Ignore the middlemen with the catchy jingles and cute commercials who want you to subscribe to their "monitoring" or "protection" service before they will request the free report on your behalf and show it to you.

They Took Out an ARM Instead of a Fixed-Rate Mortgage

If 2020 has taught us anything, it's that life is unpredictable. Why burden yourself with even more uncertainty by signing up for a mortgage whose rate will change soon? Sure, with an adjustable-rate mortgage (ARM) you can lock in an attractive low rate for a few years, but it will change. ARM rates fluctuate with the stock market. Potentially your rate could decrease, but probably it will increase.

One of the most common and advisable uses of a mortgage refinance is to escape a risky ARM and get into a predicable fixed-rate loan. The 30-year fixed-rate loan is the most popular in America for a reason. Lucky for homebuyers, ARMs are even less attractive today because fixed rates are low to begin with.


  • Homebuying and refinancing are popular now thanks to historic low interest rates. Connect with lenders who offer your best options today.
  • Learn from first-time buyers who wish they'd done something differently.
  • Keep "the $100 trick" in mind when estimating how much you can pay each month.
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