Alan Fraser Houston
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Mortgage Tips
Money Tips, Mortgage Rates, Mortgage Tips, Moving Guide, Refinance

Watch Out for Low Mortgage Rates You Have to Pay For

Posted on November 4th, 2020

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 required), as opposed to offering their par rates, the latter coming at no extra cost to the consumer.

So instead of being presented with a mortgage rate of say 2.75% on a 30-year fixed, you may see a rate as low as 1.99%. Or even a 15-year fixed at 1.75%!

Here’s the problem; with mortgage rates breaking record lows time and time again, 10+ times so far in 2020, many homeowners are finding the need to refinance the mortgage twice. Or even three times.

And those who chose to pay points at closing, only to refinance within months or a year, essentially left money on the table.

Or they decide not to refinance to an even lower rate, knowing they’ll lose that upfront cost that’s already been paid, which is also a tough situation.

Mortgage Rates Aren’t as Low as They Appear

  • In order to advertise lower mortgage rates lower than the competition
  • Lenders will often tack on discount points to their publicized rates
  • Meaning you’ll have to pay a certain amount upfront to obtain the low rate in question
  • Make sure you’re actually comparing apples to apple when mortgage rate shopping

Guess what? That absurdly low mortgage rate you saw advertised isn’t really as low as it seems.

Typically, when you see a rate that’s beating the pants off the national average, and all other lenders, 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 1.99% on a 30-year fixed would set you back $4,000.

If the loan amount were $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, which is why mortgage APR is so important.

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

  • When mortgage rates are already really low (record lows at the moment)
  • It becomes somewhat less attractive to pay points at closing
  • It could be pretty expensive to get just a slightly lower rate that will save you very little
  • And your money might be better served elsewhere, especially if inflation worsens

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 on your home loan?

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 home purchase, so committing all your liquidity to an even lower rate could mean that you won’t have money for relocation costs, furnishings, necessary repairs, or an upgrade.

And as mentioned, mortgage rates do have the potential to move even lower than current levels, meaning it could make sense to refinance again, favoring those who didn’t pay much to anything at closing.

Or better yet, just went with a no cost refinance to avoid paying anything to the bank or lender.

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.

Certainly take the time to compare mortgage rates with and without points, but don’t just chase a low rate below an emotional threshold, like 2%.

And determine how long it’ll take to pay back any points at closing with regular monthly mortgage payments.

Personally, locking in a 30-year fixed rate below 3% seems like a tremendous bargain.

Investing the money elsewhere, such as in stocks or bonds or wherever else, could end up being a lot more rewarding than paying prepaid interest at closing.

Perhaps more importantly, you’ll have access to that money if and when necessary for more pressing matters.

Lastly, you can always pay extra each month if and when you choose to reduce your principal balance and total interest paid. So that’s always an option regardless of the rate you wind up with.

Read more: Are mortgage points worth the cost?

Source: thetruthaboutmortgage.com

Money Management, Money Tips, Mortgage Rates, Mortgage Tips

When Are Mortgage Rates Lowest?

We’re all looking for an angle, especially if it’ll save us some money.

Whether it’s a stock market trend, a home price trend, or a mortgage rate trend, someone always claims to have unlocked the code.

Unfortunately, it’s usually all nonsense, or predicated on the belief that what happened in the past will occur again in the future.

Sometimes history repeats itself, sometimes it doesn’t. We probably only hear about the times when it does because it makes the individual behind it sound like a genius.

In reality, it’s very difficult to predict anything, even the weather, so when it comes to complex stuff like mortgage interest rates, success rates probably move a lot lower.

That being said, I set out to see if there were any mortgage rate trends we could glean from available data, using Freddie Mac’s historical mortgage rates that go back to 1971.

Using 50 years of data, you would think some trends would appear, right?

Were mortgage rates lower in certain months, higher during others, or is it all just random? Let’s find out.

What Time of Year Are Mortgage Rates the Lowest?

mortgage rates by month

I looked at monthly averages for the 30-year fixed-rate mortgage over the past three decades to determine if there’s a winning month out there.

It turns out there is a month when mortgage rates are lowest, and as you might expect, it’s at a time when most folks wouldn’t even be thinking about purchasing a home or refinancing an existing mortgage.

Yes, it’s December. You know, when individuals are more concerned with holiday shopping and traveling to see family then calling up a mortgage lender.

This could explain why mortgage rates are lowest in December. If you recall, lenders pass on bigger discounts to consumers when things are slow.

As alluded to, December is always going to be a slow month for mortgage lenders, which probably has something to do with the discount seen over the past 30 years.

Keep an Eye Out for a Mortgage Rate Sale

  • Mortgage lenders operate just like other types of businesses selling products or goods
  • They price their loans based on expected profit margin and operational costs
  • If their business slows down they might be inclined to lower the price (or interest rate)
  • But if they’re doing a lot of business (or even too busy) they might keep rates artificially high

Similar to any other company out there selling goods, there are “sales” at certain times throughout the year, and also times when prices are marked up.

As you might expect, if a company is trying to move product, in this case home loans, what do they do? They lower the price to drive business.

Mortgage lenders able to lower the price, or rate, because they’ve got a margin built in to their market rate.

This margin acts as their profit, minus operational costs. Sure,they may not make as much per loan if they lower rates for consumers, but they could make up for it on volume.

Instead of closing one higher-priced loan, they might be happy to close three loans and earn more on aggregate. So they have wiggle room to play with rates a bit.

They can adjust them lower when business is crawling, and simply maintain or raise them when their phone won’t stop ringing.

How Much Cheaper Can They Really Be?

  • While mortgage rates are measured in eighths of a percent (0.125%)
  • Which may look or sound like absolutely nothing when comparing rates
  • The small difference can be exponential because you pay the mortgage each month for years (possibly 30!)
  • This explains why even a marginal difference in rate can amount of thousands of dollars over time

Okay, so we know rates vary throughout the year, and even a small difference in rate can be very meaningful. But how much can you really save?

While not massive by any stretch, you might be able to get a rate .25% lower in December versus April. Same goes for October and November compared to spring.

If we’re talking about a $300,000 loan amount, a rate of 2.75% vs. 3% is the difference of roughly $40 per month, or nearly $500 per year.

Keep your mortgage for a decade and you’ll pay nearly $5,000 more over that period.

Are You Overpaying for Your Home Loan and House in April?

  • The most common time to buy a home is in spring, namely April
  • This is when prospective buyers get serious and make offers
  • It’s also when more home sellers finally agree to list their properties
  • But it might be cheaper to buy a home during fall or winter

Now speaking of April, that month tends to be prime time for home buying historically, which explains the lack of a discount.

The same goes for buying a home during April – it’s a lot less common to see a price reduction during spring than it is during fall or winter.

It all begs the question; should we buy homes when prices, competition, and interest rates are lowest? Probably.

Just one problem – there tends to be less available inventory in the fall and winter months as well. But if you do come across something you like, it could be a great time to snag a deal.

In other words, you should always be looking, even if it’s not the ideal time to move.

If you’re refinancing a mortgage, there are less obstacles in December since you’ve already got a house.

To sweeten the deal, lenders probably aren’t busy, so you’ll breeze through underwriting a lot quicker. And you could receive a little more attention from your loan officer.

Should I Wait Until December to Get a Mortgage?

In short, probably not. While December had the lowest mortgage rates on average over the past 30 years, there were plenty of years when rates were higher in December compared to other months.

Take 2018, where the 30-year fixed averaged 4.03% in January and 4.64% in December.

Same goes for 2015 and 2016, when rates were markedly higher in December versus the beginning of the year.

However, in 2020 the 30-year fixed averaged 3.31% in April and 2.68% in December, which is a difference of 0.63%. That can equate to thousands of dollars in savings.

All in all, you’re probably better off paying attention to what’s going on in economy if you want to predict the direction of mortgage rates.

The trend (moving up or down over a period of time) might be more important than the month of year.

Simply put, bad economic news generally leads to lower mortgage rates, whereas positive news tends to propel interest rates higher.

Time of year aside, you might be able to save even more on your mortgage simply by gathering quotes from more than one lender.

Ultimately, timing doesn’t seem to be the biggest driver of rates, nor is it something most of us can control anyway.

(photo: Marco Verch)

Source: thetruthaboutmortgage.com