This Lender Just Launched a 1.99% Mortgage

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.

Could you snag a mortgage under 2%?

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.

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%.

Should you pursue a 1.99% mortgage?

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.