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Freddie Mac says that mortgage rates fell to a new all-time low this week. A deeper look at the report tells a different story, though, highlighting the need to be careful about what you read, and how you read it.
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Each week, mortgage-backer Freddie Mac performs a mortgage rate survey, polling more than 125 banks across the country. The survey queries for current mortgage rates for various products, and their accompanying discount points.
"Discount points" are loan fees paid at the time of closing. They are paid in addition to your "typical" mortgage closing costs; items such as appraisal fees; underwriting fees; and, title fees. Discount points are charged as percentage of your total loan size.
1 discount point is equal to one percent of your loan size.
If you ask a lender what discount points do, he'll tell you that "discount points are an up-front payment that get you access to 'below-market' mortgage rates". This is why loans with discount points have lower mortgage rates than loans with no discount points.
It's also why Freddie Mac's published mortgage rates are routinely lower than the rates published by companies such as HSH and the Mortgage Bankers Association.
Freddie Mac's published rates assume you want to pay a big set of closing costs.
This week's Freddie Mac mortgage rate survey contains a little bit of trickery. It says that the average 30-year fixed rate mortgage rate dropped to 3.94%. However, it also also says that number of accompanying discount points rose to 0.8.
To compare last week and this week :
Conforming mortgage rates fell, we see, but the discount points required to get them rose, which means that homeowners aren't getting as much of a benefit as the "headline numbers" make you think. The impact of falling rates is muted when discount points rise.
To put this conversation to a real-life example, assuming a $300,000 loan size:
So, it will take nearly 3 years for the homeowner to "come out ahead" on this week's extra 0.1 discount point. That's hardly instant savings.
If you're shopping for a mortgage rate today, you may not find Freddie Mac's survey altogether too useful anyway. This is because Freddie Mac's reporting banks assume homeowners from California to Virginia want to pay discount points.
Most people don't. Discount points make for higher closing costs -- especially on a refinance. See, on a purchase, you can sometimes get the seller to pay your discount points and closing costs. On a refinance, however, you're on your own.
Unfortunately, counter to the Freddie Mac "with points" rates, "no points" rates have been rising.
There is a proposed mortgage servicing change that's influencing how no-points, low-cost, and zero-closing-cost mortgage rates are priced. Lenders may get paid less to collect payments each month, so they've shifted some "fee collection" to the origination side of the business. It's making real costs for consumers and is one reason why waiting for rates to fall could be a bad idea for 2012.
Zero-closing cost mortgages are nearly extinct, and zero-point loans could be next. Freddie Mac's published rates may fall, but everyone wanting a mortgage will be forced to pay those discount points.
It's hard to save money on your mortgage when you've got big fees.
If you've been shopping for a mortgage and waiting for a bottom, remember that there are two parts to your price. There's the rate, and there's the fees. Mortgage rates may drop, but loans aren't getting cheaper. This week's 3.94% rate is not what it seems.
Rates change daily (and often more often than that). Make sure you're working with today's rates only.
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan ator click to get a free, no-obligation rate quote.
You can also find Dan on Twitter and Google+.
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