The end of the era of rising interest rates due to inflation is finally in sight, presenting new opportunities to save on your mortgage. As I write this, economic reports are aligning with the Federal Reserve’s criteria for initiating the next round of quantitative easing (rate cuts). While the Federal Reserve doesn’t directly control mortgage rates, their policies significantly influence them. Current forecasts suggest the initial rate cut could occur in September, leading to a gradual, multi-year decline in mortgage rates. So, how can you take advantage of this opportunity, whether you're buying or refinancing, without falling into common traps?
For most people, securing a home loan isn’t a frequent experience, which can make understanding the long-term impact of interest rates and associated costs challenging. Unlike car dealerships, which may push you towards expensive add-ons, lenders might offer rates that seem attractive but come with hidden costs. The first question people often ask is about the interest rate, but a crucial follow-up question is: What will the lender's costs be to secure that rate?
Lenders profit either through the interest rate they offer, the fees they charge, or a combination of both. There is no industry standard for everyday rates or lender fees. Consequently, lenders may exploit this by charging various fees: loan origination, underwriting, processing, document preparation, and others. Additionally, they might offer lower rates in exchange for upfront discount points. Remember, any money paid upfront is a sunk cost that you can never recover. This applies to both new mortgages and refinances. Refinancing can be particularly tricky, as some lenders might promise no closing costs but then include these costs in your loan balance.
Consider this example: A client was initially set to buy a home with a 6.25% interest rate, with no fees or discount points. He later found a lender offering a 6.00% rate with no upfront cost. However, the new lender charged a $1,400 loan origination fee. The $55 monthly savings on the rate would take 25 months to break even. Should you pay upfront costs for a lower rate, or is there a more strategic approach?
Will you ever break even is the first question to ask yourself. In the fall of 2023, interest rates were 1.5% higher than they are now. Many who sought to escape those high rates spent thousands upfront to buy discount points and cover lender fees to reduce their rate by 0.25% to 0.75%, only to face breakeven points of over four years. If they had chosen a lender with a fair market rate and no upfront costs, they could have refinanced sooner to a lower rate without losing money on upfront costs. As interest rates continue to decline, refinancing to a lower rate could mean that any upfront fees paid are lost.
The Federal Reserve plans to implement rate cuts totaling around 3%. While the exact timing and pace of these cuts are uncertain, the trend is clear; rates are likely to fall. Therefore, it’s wise to avoid paying upfront costs with long breakeven points. Instead, opt for no-cost options and capitalize on refinancing opportunities to maximize your savings over time.
Did you know you can refinance to a lower rate at no cost, without adding to your loan balance, and without a breakeven point? I’ll cover that in a future article, but in the meantime, feel free to contact me to learn more.
At Trident Home Loans, we’re here to assist you whether you’re securing a loan or seeking advice. Contact me at [email protected] or on my cell at 850-377-1114. I'm always happy to help you navigate the mortgage process. Also, check out my previous articles on pilot mortgages available on Aero Crew News.
