These days, mortgage rates aren’t as cheap as they used to be. And that is the understatement of the century.
The 30-year fixed is currently priced around 7%, more than double the ~3% rate offered in early 2022.
That has mortgage lenders scrambling to separate themselves from the crowd amid a shrinking pool of eligible borrowers.
We’ve seen the temporary buydown gain steam lately, where the interest rate is reduced the first year or two, typically paid by the home seller or lender.
Another common tactic is to waive lender fees on subsequent transactions, with the expectation mortgage rates will get better. But is it a good deal?
Use a Mortgage Lender Now That Promises No Fees Later?
Some mortgage lenders are offering no lender fees when you use them a second time.
Think of it as a sort of “mortgage loyalty program.”
For example, pick them as your lender today and you’ll be offered the chance to refinance in the future sans the typical fees.
This means they’ll waive whatever fees they charge, such as a loan origination fee, underwriting and processing fees, and so on.
Generally, third-party fees such as title insurance, credit report, and home appraisal will still be charged.
However, this could amount to thousands in savings depending on the loan amount.
On a $500,000 mortgage, a 1% loan origination fee alone is $5,000. Throw in a couple thousand more for underwriting/processing and your savings are pretty significant.
This is the pitch some lenders are throwing out there. And it’s all pretty much rooted in the idea that these high mortgage rates are temporary.
You marry the house, but date the rate. And once mortgage rates start behaving again, they’ll take of you, for free.
It sounds pretty sweet, but is it? Will rates actually come down? And will this particular lender offer the best pricing in the future?
Heck, will they still be in business in a couple years? There are a lot of unknowns here. And for that reason, it might be better to focus on the now.
Focus on Savings Today, Not Potential Savings Later
Whenever I buy something, whether it’s a microwave, a car, or a house, I’m focused on the right now.
What price can I pay today? How much can I save currently? Because I don’t know what the future holds, my decision making it driven by the present.
With regard to a home loan, things can get even more complicated. It’s a much bigger purchase and it stays with you for a long time.
Aside from things outside my control, like the future direction of mortgage rates, my own situation might change.
I may not even keep the property. Or I might not qualify for a mortgage in the future. There’s a lot of uncertainty.
And as noted, I don’t know where mortgage rates will go. They could go even higher and stay higher. That would quash the expected benefit of a refinance.
Or as mentioned, my original lender could close its doors. Then what good is my fee-free mortgage from a nonexistent company?
The point I’m trying to make is I wouldn’t put a lot of weight in future, potential savings. A lot can go wrong between now and then.
I’d much rather have the best deal in my pocket today.
Certainly Do Not Pay Discount Fees Now If You Plan to Refinance Soon
If you do happen to go with a mortgage lender offering a no cost refinance in the future, make sure they’re competitive today.
You don’t want to overpay for possible savings later. If they’re the best-priced lender now, sure, it’s icing on the cake.
But take a hard look at your pricing. One thing a lot of lenders do these days is tack on multiple discount points.
They are a form of prepaid interest that lower your mortgage rate. So you pay a couple points and get a rate of say 5.99% instead of 6.75%.
Sure, it’s a lower rate, but you pay for it at closing. And points can get expensive depending on the loan amount.
Worst of all, if you refinance before the break-even period on those paid points, you lose the expected savings.
Simply put, if you expect to refinance sooner rather than later, paying points probably isn’t going to be a good deal.
Points make sense when you’re locking in a mortgage rate for the long-haul, as the savings often take a few years to emerge.
Most economists and lenders expect mortgage rates to fall in the somewhat near future. This supports the idea of a refinance in the future (maybe a fee-free one), but not paying points.
Read more: How soon can you refinance a mortgage?