Mortgage rate Q&A: “Can you get a 4% mortgage rate?”
This seems to come up a lot now that mortgage rates are no longer on sale.
Prospective home buyers want to know if you can still get a super-low mortgage rate.
Maybe not a 2-3% rate, but something in between, such as a 4-handle. Even just 4.99%.
The short answer is market rates are significantly higher today, but there are still ways to get there.
Mortgage Rates Today Are Back Near 7%
A couple of months ago, after mortgage rates surged higher due to the conflict with Iran, I wrote that you could still get a sub-6% mortgage rate.
This was despite rates climbing from around 5.875% to 6.5% from February to June.
But I questioned whether it was worth it.
What I meant by that was there was a cost to getting a below-market rate. And a potentially big one at that.
When it comes down to it, you can always pay money upfront (if you have money!) to get a lower interest rate.
Banks and mortgage lenders are happy to take your money today for a lower interest rate tomorrow.
This is known as prepaid interest and it’s a very common way to snag a lower interest rate.
You accomplish this by paying points at closing, mortgage discount points specifically.
The cost of each point is determined by the loan amount. So the larger the loan, the more expensive the point.
For example, one point on a $300,000 loan is $3,000. Not cheap, but not too crazy.
Conversely, a $1.2 million loan with one point would cost you $12,000 upfront. Now it’s getting a little steep.
Especially if you are paying more than one point. That too isn’t very uncommon these days.
Just last week I wrote about Chase advertising mortgage rates with nearly two discount points required.
This is their way of “keeping rates low” despite the recent, unfriendly trend of them climbing higher and higher.
But if you have to pay thousands of dollars for it, is the rate actually low? Or just paid a different way?
It’s actually complicated because when you buy down your interest rate, there is a breakeven period where the lower monthly payments finally eclipse the upfront cost.
You can give my mortgage points calculator a try to see what I mean.
Regardless, this is one way to get a lower-than-market interest rate. And probably the most common.
And if you’re asking a question like “Can I still get a 4% mortgage rate?” paying points will likely be the answer experts share.
We Are Too Far From 4% to Buy Down the Rate That Far
Of course, given where mortgage rates are today, a buydown likely wouldn’t be enough to get there.
While paying points can be a decent strategy to obtain a lower interest rate, there are limitations.
It’s expensive to buy down a rate and it often costs about one full percent of the loan amount to get the interest rate down by 0.375%.
So if the national average 30-year fixed is 6.75% today, it might take two points just to get to 5.99%.
Again, that might already be pretty expensive. So paying even more could be completely out of the question.
There are also limitations on many loans that limit how much you can spend on points and fees, practicality aside.
And given today’s rate is 6.75% or so, getting to a 4-handle, even 4.99%, is likely a bridge too far.
It also might simply not be worth it. Imagine paying five points to get a 4% mortgage rate, assuming you could, on a $500,000 loan amount.
That’s $25,000. Many prospective home buyers don’t even have the funds for a 5% down payment, let alone 5% more to buy down the rate.
So How Can You Get to 4% or Lower Today?
Well, those buying an existing home likely won’t be able to do it strictly with points.
At least not on a 30-year fixed. Perhaps you could get an adjustable-rate mortgage (ARM) in the high 4s.
Something like a 7/6 ARM or 5/6 ARM, which is fixed for the first seven or five years respectively.
But then it can adjust, perhaps a lot higher.
If you’re buying a newly-built home, there is a chance you can land in the 4s. This is a special advantage home builders have where they can use forward commitments to offer well-below market rates.
However, this only works for new homes, and you might not want a new build located in the outskirts of town.
If you do want a “used home,” you can still get the seller to buy down your rate, like a builder, but as noted, likely only to a high-5-handle.
The other option for existing homes is an assumable mortgage. Find someone advertising a loan assumption on their property.
Perhaps they have a 4% mortgage rate, or something even lower, such as 3% or even a 2% rate.
Just know there are limitations there as well, such as the assumption gap, which will require either a large down payment, second mortgage, or both.
This all kind of points to rates being a lot higher than 4% today and requiring “extreme measures” to get anywhere close.
Ask the Seller for a Credit and Pay Extra Each Month Too
A better middle ground could be getting some seller concessions and applying that to a rate buydown, but not going haywire.
Maybe settling for a 6% rate via the buydown and then using excess cash on hand to pay extra each month.
Together, that strategy can reduce your total interest expense and bring down your equivalent interest rate to something closer to 5% or lower.
In the meantime, you can hope rates eventually move lower again and apply for a rate and term refinance when they do.
But ultimately, the only way we’ll get back to the 4s on a national average will be with a bad recession, another round of QE, or some miraculous balancing act where inflation drops and deficits plummet.
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