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.
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
- In order to advertise lower mortgage rates
- Lenders will often tack on discount points
- Meaning you’ll have to pay a certain amount upfront
- To get the low rate in question
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?
- When mortgage rates are already really low
- It becomes less attractive to pay points
- It could be pretty expensive to get just a slightly lower rate
- And your money might be better served elsewhere, especially if inflation rises
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.
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.