I’ve seen a lot of articles lately talking about how you can still get a mortgage rate under 6%, despite the recent increase.
We have had mortgage rates of 5% as recently as early March, but they have risen above 6.5% because of the conflict with Iran.
They’ve been stuck there ever since and even threatened to get closer to 7% before the deal was done.
Despite all that, you can still get a 30-year fixed mortgage that starts with a “5.”
But is it really worth the cost to do so?
Real Estate Rates Are Still 5 Years Ago
If you go to a mortgage rate comparison site, or even look at the rates advertised on this blog, you will notice five mortgage rates.
But if you dig a little deeper and look at the fine print, you’ll see that there are mortgages that are required to get those rates.
These points, technically known as mortgage discount points, allow borrowers to get below-market rates.
Prepaid interest that you can pay at loan closing to get a lower interest rate.
But since you’re paying points upfront, the monthly savings from the low interest rate won’t cover those costs for years to come.
You Can Get A 5.75% Home Loan Rate Today But It Will Cost You
For example, if you are offered a rate of 5.75% today, which is about 0.75% below the rate (rate without cost or discount), you may be required to pay 1.5-2 points upfront.
A point is just a percentage point so for every $100,000 you borrow to finance your property, one point equals $1,000.
If you take out a $400,000 loan, one point would be $4,000. If it’s two points, it’s $8,000.
You only get “payback” with lower monthly mortgage payments, which cover those earlier costs over time.
In the end, you “win” because you have paid upfront costs and your monthly payments are lower for the remainder of the loan term.
But this only works if you stay in the mortgage/property long enough to break even.
I created a mortgage score calculator that calculates this grace period to help decide if it makes sense or not.
It includes how long you plan to stay in the property and the tax rate you choose to get things right.
In our example above, it would take about two years and eight months to break even if you bought your mortgage rate from 6.5% to 5.75% at a cost of two basis points.
That’s not too bad as most can stay on the loan/property for at least a few years in most cases.
And to make things even better, you can often get dealer permits (credits) that can be used to purchase your merchandise. So it doesn’t even come out of your pocket.
It Depends on What Happens to Mortgage Rates
Before you look at the statistics and think that this is absurd, I will definitely stay in this place for 2-3 years, there is another factor to consider.
What if mortgage rates fall back into the 5s or even lower in the next few years?
At that time, you will have the opportunity to apply for a rate and a refund term to lower your rate, free of charge.
That could mean that potential savings would be lost, or that you didn’t have to pay thousands of dollars up front to get a lower rate.
Instead, you accept today’s rate and wait for prices to improve, at which point you take advantage of the opportunity to refinance.
Of course, low prices are not a sure thing and could actually go up from here, at which point paying a buyout of as low as 5 would look smart.
Another option is to go with an entirely different loan plan, such as an adjustable rate loan.
Both the 5/6 ARM and the 7/6 ARM offer a fixed interest rate for the first five to seven years before the first rate adjustment.
Meanwhile, if prices fall you can refinance. If it is low or low, you can save your ARM after it is repaired.
Or maybe you move at some point during those years. The only thing you would really need to worry about would be if your mortgage rates go up unexpectedly.
