Watch Out for Low Mortgage Rates You Have to Pay For

May 7, 2012 4 Comments »
Watch Out for Low Mortgage Rates You Have to Pay For

Mortgage rates keep on marching lower and lower, with new records broken seemingly every week.

But with all the fervor surrounding mortgage rates, some lenders are playing the “how low can we appear to go” game.

For example, mortgage lenders may be talking about their lowest rates (with multiple points), as opposed to offering their par rates, the latter coming at no cost.

So instead of being presented with a mortgage rate of say 3.75% on a 30-year fixed, you may see a rate as low as 3.375%. Or even a 15-year fixed below 3%!

Rates Aren’t as Low as They Appear

But guess what? That absurdly low rate isn’t really as low as it seems.

Typically, when you see a rate that’s beating the pants off the national average, mortgage points must be paid.

And when the rate is really, really low, it usually means multiple mortgage points must be paid.

In other words, you wind up paying a substantial amount of money, known as prepaid interest, to secure an ultra low, below-market interest rate.

Assuming your loan amount is $200,000, two points to obtain a rate of 3.375% on a 30-year fixed would set you back $4,000.

If the loan amount is $400,000, we’re talking $8,000 upfront to secure that super awesome low rate.

Tip: Watch out for lenders and mortgage brokers who quote you a low mortgage rate, but neglect to tell you that you must pay a point (or two) upfront to obtain it.

Often, this tactic is employed to snag your business, and once you’re committed, the truth comes out.

Is Paying for a Lower Mortgage Rate Right Now the Smart Move?

Here’s the thing. Mortgage rates are already so low that paying mortgage discount points to go even lower isn’t all that attractive.

There’s a great chance mortgage rates will surge higher in the future as inflation finally rears its ugly head. And at that point, you’ll already have an insanely low interest rate.

On top of that, you’ll be able to invest your liquid assets in other high-yielding accounts, likely something pretty darn safe with a rate of return that will beat your low mortgage rate.

So why keep going lower and lower if you’re already paying next to nothing?

Additionally, you won’t want to spread yourself too thin, especially if you’re buying a new house.

There are a ton of costs associated with a new purchase, so committing all your liquidity to an even lower rate could mean that you won’t have money for necessary repairs, or an upgrade.

As always, do the math to see what makes sense for you. If you’re super serious about paying off your mortgage early, then buying down your rate could be the right move.

It will certainly vary based on your unique financial situation, the loan amount, the cost to buy down the rate, and how long you plan to stay with the loan/home.

Personally, locking in a fixed rate below 4% seems like a bargain. Investing the money elsewhere, such as in stocks or bonds or wherever else, could end up being a lot more rewarding. And you’ll have access to that money if and when necessary.

Read more: Why adjustable-rate mortgages are bad news right now.

4 Comments

  1. James Toliver May 7, 2012 at 2:16 pm -

    Good article. So many people are fixated on rates that they don’t seem to do any mathmatical calculation to see how long it will take to recoup the cost of the refinance. I know of a company that will remain nameless that are charging 1% origination and 2% discount points to put Veterans in to a 3 year Arm at 2.5%. God only knows what they are making when they sell the loan. They do a hard sell like the car dealerships do. If the sales person can’t close the deal on the first sales call, they are required to call corporate to have the borrowers talk with a sales manager to close the deal.

  2. Stephanie June 30, 2013 at 5:29 pm -

    I wish lenders would just advertise mortgage rates without points. The rates aren’t really that low if you have to pay a bunch of prepaid interest upfront to get the rate. But like anything else, they want to get you in the door…Check the fine print!

  3. Adrian July 23, 2013 at 12:14 am -

    From what I gather, every single mortgage rate advertised seems to have points involved, meaning you have to “pay for it.” Does any lender just offer rates with no points or fees?

  4. Colin Robertson July 23, 2013 at 11:20 am -

    This is semi-true, though there are the no-cost lenders that advertise rates with no closing costs whatsoever. Of course, the fees are built into the rate, so the rate should be higher to compensate.

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