Don’t Freak Out About the Recent Mortgage Rate ‘Spike’

Queue the panic. Mortgage rates have officially spiked and the media is all over it. Yep, the average rate on a 30-year fixed mortgage increased from 2.65% to 2.79% this week, per Freddie Mac’s weekly survey. Freddie Mac Chief Economist Sam Khater noted in the weekly news release that mortgage rates have been under pressure [&hellip

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Why Are Refinance Rates Higher?

Mortgage Q&A: “Why are refinance rates higher?” If you’ve been comparing mortgage rates lately in an effort to save some money on your home loan, you may have noticed that refinance rates are higher than purchase loan rates. This seems to be the case for a lot of big banks out there, including Chase, Citi, [&hellip

The post Why Are Refinance Rates Higher? first appeared on The Truth About Mortgage.


An Alternative to Paying Mortgage Points

An Alternative to Paying Mortgage Points

If and when you take out a mortgage, you’ll be faced with an important choice. To pay or not pay mortgage points.

In short, those who pay points should hypothetically secure a lower interest rate than those who do not pay points, all else being equal.

That’s because mortgage points, at least the ones that are bona fide discount points, are just a form of prepaid interest.

So you’re essentially paying a portion of the interest on the underlying loan upfront, as opposed to monthly over the life of the loan term.

The caveat is that it is possible for a home buyer or refinancer to obtain a lower mortgage rate than another borrower without paying any points, assuming they shop around and use a mortgage lender with lower rates.

Now back to whether you should pay points or not, especially at a time when mortgage rates continue to hit new all-time lows.

Mortgage Rates Have Hit Record Lows 12 Times This Year

In an environment where mortgage rates are declining over a long period of time, paying mortgage points can be a mug’s game.

After all, you paid money upfront for a lower mortgage rate, only to find yourself back at the refinancing table. No bueno.

Indeed, many homeowners these days are asking the question, how soon can I refinance again?

Those who went the no cost refinance route have basically nothing to lose, other than maybe resetting the mortgage clock.

While those who paid several thousand dollars in closing costs, of which points made up the lion’s share, potentially have a lot to lose if they take out a new home loan right away.

Paying Points vs. Paying a Little Extra Monthly

$400,000 Loan Amount Pay Points Pay Extra Monthly
Upfront Cost of Points $4,000 $0
Mortgage Rate 2.5% 2.75%
Monthly Payment $1,580 $1,680
Extra Payment $0 $47
Loan Balance After 48 Months $362,324 $361,316
Total Paid After 48 Months $79,840 $80,640
Net Savings $208

Let’s consider a $400,000 loan amount where a borrower pays one discount point to obtain a rate of 2.5% on a 30-year fixed mortgage.

And an alternative where the homeowner decides not to pay any points and settles for a rate of 2.75% instead.

The homeowner who paid $4,000 upfront would enjoy a monthly payment of about $1,580 versus the higher payment of $1,633 for the no-points borrower.

That’s a difference of about $53 per month, which would take around four years to recoup when you consider the lower-rate mortgage reduces the outstanding principal balance faster.

Now if you didn’t want to pay that extra $4,000 at closing, you could simply go with the higher mortgage rate but still wind up with a similar mortgage balance after four years.

Simply pay $47 extra each month ($1,680 total) and your remaining loan balance would be around $361,316 after 48 months.

Meanwhile, the cheaper mortgage would be roughly $362,324 at that time with regular monthly payments.

That’s about a $1,000 difference for an extra $4,800 in payments over that time ($100 x 48). So the net cost is $3,800 over that time, slightly lower than the $4,000 paid upfront.

In the end, both borrowers are in a similar spot after four years, but the borrower who didn’t pay points had the option to refinance if rates moved even lower.

And they could pay extra each month to stay on track or just pay the minimum and invest the money elsewhere at hopefully a higher return.

Now, after those first four years are up, the math will start to benefit the homeowner who opted for the lower-rate mortgage in exchange for upfront points.

But how many homeowners are actually keeping their mortgage (or house) that long? Lately, not many.

In summary, this is just an inverse way of looking at buying mortgage points, which illustrates how those who don’t stick around for a long time can actually benefit from not paying points.

The counterargument is that rates are at record lows and will likely only go up from here, so if you can lock an even lower one in today, why not?

But we thought they had hit rock bottom years ago, only for them to defy the odds over and over again.

And as I mentioned, a borrower who actually takes the time to comparison shop could enjoy the best of both worlds.

[Watch out for low mortgage rates you have to pay for!]

Benefits of Not Paying Mortgage Points

  • You basically get flexibility versus a non-refundable upfront payment
  • Can refinance to a lower rate without worry at any time
  • Can sell your property whenever you want without leaving money on the table
  • Can still save on interest and reduce the loan term simply by paying extra each month
  • Gives you the option either way if you stay with the mortgage/property longer than planned
Don't let today's rates get away.
About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.


Beware the New Mortgage Fee Fearmongering

Beware the New Mortgage Fee Fearmongering

You may have heard there’s a “new mortgage fee.” And you might have been told to hurry up and refinance NOW to avoid said fee.

While there is some truth to that, it is by no means a reason to panic, nor is it even applicable to all homeowners.

Additionally, it’s possible it may not save you money to refinance now versus a couple months from today, depending on what direction mortgage rates go.

So before we all get in a tizzy and give in to what some are clearly utilizing as a scare tactic, let’s set the record straight.

What the New Mortgage Fee Is and Is Not

  • A 50-basis point cost known as the Adverse Market Refinance Fee intended to offset COVID-19 related losses
  • It’s not a .50% higher mortgage rate
  • It’s an additional .50% of the loan amount via closing costs
  • Only applies to mortgage refinance loans backed by Fannie Mae or Freddie Mac
  • Home purchase loans are NOT affected by the new fee
  • Nor does it apply to FHA loans, USDA loans, or VA loans

Over the past week, I’ve been bombarded by articles warning of the new mortgage fee – most feature something to the effect of “refinance now” and “act fast!”

But in reality, you might not need to do anything different, nor hurry.

Sure, it’s an amazing time to refinance a mortgage, what with mortgage rates hovering at or record all-time lows. No one can argue that.

Still, it all seemed to come to a screeching halt two weeks ago when Fannie Mae and Freddie Mac surprised us with their Adverse Market Refinance Fee, which is designed to offset $6 billion in COVID-19 related losses.

Why would they do such a thing at a time when the economy (and homeowners) are already suffering due to COVID-19? Well, that’s a different story and not really worth getting into here.

The important thing to know is this new mortgage fee only applies to home loans backed by Fannie Mae and Freddie Mac, and only if you’re refinancing an existing mortgage.

It has nothing to do with FHA loans, USDA loans, VA loans, or home purchase loans. Or jumbo loans while we’re at it.

Additionally, they have since exempted Affordable refinance products, including HomeReady and Home Possible, and refinance loans with an original principal amount of less than $125,000.

Some single-close construction-to-permanent loans are also exempt.

In terms of cost, it’s .50% of the loan amount, not a .50% increase in mortgage rate. That could mean another $1,500 in closing costs on a $300,000 loan, which is nothing to sneeze at.

But mortgage rates don’t live in a vacuum, and can change daily, so how much more (or less) you’ll actually pay depends on what transpires between now and the implementation date.

When Does the New Mortgage Fee Go into Effect?

  • Applies to loans purchased or delivered to Fannie and Freddie on or after December 1st, 2020
  • This means you’d want to apply for a refinance 60 or so days before that cutoff
  • Since mortgages are sold and securitized once the loan actually funds
  • But remember there’s more to mortgage pricing than just this new fee

The fee was originally supposed to go into effect for loans purchased or delivered to Fannie and Freddie on or after September 1st, 2020, but after much uproar, they just delayed it to December 1st, 2020.

This doesn’t mean you have until December 1st to apply for a refinance in order to avoid the fee.

Since we’re talking purchase of your loan or delivery of your loan so it can be bundled into a mortgage-backed security, there needs to be a buffer.

We have to account for how long it takes to get a mortgage, plus the post-closing stuff that takes place before delivery or sale.

You’d really want to get your refinance in maybe 60+ days prior to December 1st to be safe, though it’s unclear if mortgage lenders will already start baking in the fee even earlier.

If not, you might be stuck paying an additional .50% of your loan amount, either via out-of-pocket closing costs or a slightly higher mortgage rate.

Assuming you don’t want to pay anything at the closing table, your interest rate might be .125% higher, all else being equal.

So if you qualified for a 30-year fixed mortgage rate of 2.5%, it might be 2.625% instead. On a $300,000 loan, it’s about $20 higher per month.

Sure, nobody wants to pay more, but it shouldn’t be a refinance deal breaker for most folks.

And here’s the other thing – mortgage rates might move lower over the next few months due to, I don’t know, COVID-19, the most contentious presidential election in recent history, a stock market that could collapse at any moment, and so on.

In other words, if mortgage rates drop another .25% or .375% by later this year, it’s possible to come out ahead, even with the new fee.

The counterpoint is not to look a gift horse in the mouth. Either way, don’t panic.

Don't let today's rates get away.