Wednesday, March 22, 2023

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Why You Still See a 5% Mortgage Rate

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It’s been tough on mortgage rates over the past month.

They are actually starting in 2023 with a drop for the entire month of January. before things will turn badly

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Without being overly protracted, strong economic data pushed rates back to their highest in a decade.

The culprits are the CPI report and the employment report. Both of which were hotter than expected.

These make the argument that inflation is peaking. Still, you might come across a 5% mortgage rate when the news tells you they’re at 7%. Why?

How is it possible to offer a 5% mortgage rate?

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The latest weekly poll from Fannie Mae places the 30-year constant at 6.65%, the highest level for 2023 and the highest level since November 2022.

Before that, the 30-year fixed mortgage rate was under 7% since April 2002. Yes, it’s been a good 20 years.

In early February of this year The return rate is below 6%, although this rarely happens. But it’s still a sign that we may have turned the corner.

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Then came the employment report for January. This was followed by the CPI report in mid-February. which change the rate per capita

All the progress since November vanishes in the blink of an eye. Today, you might see headlines stating that mortgage rates are back at 7% (and higher).

But if you make comparison purchases on a mortgage website. You might still come across rates in the 5% range? how? The answer is simple. Discount points.

If you pay more when you close your account You will get a lower rate.

Simply put, lenders that still advertise mortgage rates in the 5% range (called 5.99%) are more likely to use discount points.

This is a prepaid interest model. And prepaid interest at closing means you pay less during the loan term.

In general, pay points are completely optional. But because of the chaotic mortgage market Lenders therefore often require points to be paid.

However, those who pay more now can save later. So while the 30-year fixed rate may be at 7%, you may still be able to spike the rate in the last 5 seconds.

However, you will pay a lot of money at the closed table. Or ask the seller for a concession to go there.

Often you’ll have to pay a few discount points to push your rate below 6%.

For a hypothetical $500,000 loan amount, we’re talking about $10,000 to cover the issues.

You may have other closing costs to worry about, such as loan origination fees. This includes third party fees such as title insurance and home appraisals.

can be very expensive and the worst You may not get the money back. If you don’t keep the loan long enough You may not even reach the break-even point for those upfront costs.

The low advertised mortgage rate reminds me of car rental specials.

If you have ever bought a car Especially car hire purchase You may see ads for low monthly payments.

For example, $299 to rent a car X for 36 months. That sounds great and probably much lower than the competition.

But if you read the details, you’ll find that the low payment requires a down payment of $3,000.

Suddenly, $299 doesn’t seem appealing. when using simple mathematics If we add that $3,000 back equally Together over 36 months, the payment would be $382. Then you add taxes and you’re at $400+.

The difference with a mortgage is that you can save money by paying points up front. After all, you’ll get a lower interest rate.

And lower rates result in less interest payments each month. The key is to keep the loan long enough as stated.

But if these 7% mortgage rates were to be expected, they would calm down. You may not want to use that 5.99% rate at all.

Speaking of, watch out for the chase rate that is below the critical threshold. The 6.125% acceptance rate may be cheaper compared to the 5.99% rate.

and a small difference in monthly payments

Shop More When Mortgage Rates Rise

Distribution of Mortgage Rates

Freddie Mac recently conducted a study. this to follow The “daily spread of mortgage interest rates” over time.

in short “Similar borrowers may receive significantly different rates” on the same day. It depends on the lender they talk to.

Similar borrowers refer to people with similar credit situations. including the same type of credit same credit score range type of assets, loan amount, LTV, etc.

despite comparable credit risk But the average mortgage rate spread was up about 50 basis points (0.50%) and above 0.70% in October and November 2022.

That was the last time mortgage rates were above 7% before that period. The spread of mortgage rates is generally less than 20 basis points (.20%) from 2010 to 2021. See chart above.

in other words Mortgage rates are not much different from one lender to another. So if you don’t buy the product it may be okay

But by the end of 2022, the distribution had skyrocketed. This means choosing the right lender based on price is more difficult.

And the likelihood of landing at a better rate correlates with the number of quotes received.

Back in October and November 2022, borrowers who received two quotes saved up to $600 per year, while those who received four or more quotes saved $1,200+.

Even if the average mortgage rate is 6%, a similar borrower might get a 6.5% quote one day and 5.5% the other depending on the lender.

Because mortgage rates change every day. Gathering quotations over the course of days or weeks may increase your chances of defining the right moment.

Sure, you might get lucky in your first bid. But why leave it to chance?

in short Buy more when mortgage rates are high.

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