Published in: Mortgages | Aug. 12, 2020
By: Maurie Backman
How about an almost unbelievably low rate?
The lower your mortgage rate, the more affordable your home will be in the long run. In the recent past, a 30-year fixed mortgage at an interest rate under 4% was considered very competitive. In recent weeks, however, the 30-year mortgage has fallen below 3%, making now a very good time to lock in a home loan. But one lender is taking the concept of low mortgage rates to an impressive extreme.
United Wholesale Mortgage announced earlier this week that it's offering mortgage rates as low as 1.99%. That applies to new home loans and refinances -- but there's a catch.
In exchange for that low rate, borrowers pay more up front in closing costs and points on their mortgage. If you're not familiar with mortgage points, they're basically a fee you pay a lender at closing to score a lower rate. Each point on your mortgage is the equivalent of 1% of your loan amount and usually lowers your rate by .25%, so if you're taking out a $200,000 mortgage and pay two points for a lower rate, it'll cost you $4,000 at closing. That $4,000 is in addition to the standard closing costs when you sign a home loan -- things like loan origination fees, filing fees, and application fees.
So a 1.99% mortgage may not be as good a deal as it sounds. That is a really low rate, but you might pay two or three times more at closing than what you would for a higher rate -- say, closer to 3%. And while you'll generally come out ahead if you stay in your home for a long time, if you're buying a starter home, or a home you're not sure you'll live in for more than three or four years, then it could in fact be smarter to get a higher mortgage rate.
9 in 10 Americans can qualify to refinance their mortgage. With mortgage rates plummeting to multi-decade lows, there's no better time to cut your monthly mortgage payment.
Imagine you take out a 30-year fixed $200,000 mortgage at 3% and pay $3,000 in closing costs. Your monthly payment of principal and interest is $843. Imagine that you take out the same loan at 1.99%, but pay $9,000 in closing costs and points. Your monthly payment is $738 for principal and interest -- $105 a month in savings. But it will take you close to five years to break even from your higher closing costs. Therefore, if you're planning to stay in your home for a long time, it could pay to go after United Wholesale Mortgage's 1.99% loan. Otherwise, you may be better off with a higher interest rate that costs you less up front.
Finally, to qualify for a 1.99% rate, you'll need excellent credit. If your score is not in the mid-700s or higher, you may not get that rate. You should also expect to make a 20% down payment on your home to score a rate near 1.99%.
When financial offers seem too good to be true, it's sometimes because they are. While a 1.99% mortgage is extremely competitive, there are strings attached in the form of higher closing costs and tighter borrowing requirements, so don't count on snagging a rate under 2%. On the other hand, if you're able to get a 30-year mortgage around 3%, that's certainly nothing to feel bad about.
Chances are, mortgage rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase. Click here to get started by scanning the market for your best rate.
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