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1.875% mortgage rates: How one lender keeps lowering the bar

Casey Morris
The Mortgage Reports contributor

Yep, you read that right: 1.875% mortgage rates

Mortgage rates have plummeted across the country since the coronavirus pandemic hit.

But even in a low-interest era, United Wholesale Mortgage (UWM) stands out from the rest.

UWM first wowed borrowers with 2.5% rates in May. Then it took VA rates as low as 2.25%.

Now, United Wholesale is offering the nearly unthinkable:

1.875% rates for 15-year fixed mortgages, and 1.999% for 30-year fixed — to select borrowers, of course.

So who actually qualifies for a rate below 2%? And just how does UWM keep lowering the bar for mortgage rates?

Find and lock a low rate (Dec 3rd, 2020)

How sub-2% rates are possible

If you think a mortgage rate in the 1s sounds too good to be true, you’re partly right and partly wrong.

Record-breaking rates do exist right now, but you have to be a very strong borrower to qualify for one. (More on that below.)

Perhaps most importantly, you need to understand the terms that come with an ultra-low rate. It’s all in the fine print.

Discount points

The big catch is, borrowers usually have to pay for such low rates.

Mortgage lenders give you the option to buy “points” for a lower interest rate. That means you pay a fee upfront to decrease the amount of interest you’ll pay over time.

Most of the record-low rates advertised these days are only possible if the borrower decides to buy points.

Each point costs 1% of your mortgage loan and typically lowers your rate by 0.25%.

Whether this option is affordable for you depends on how large a loan you’re taking out. For example:

  • If your mortgage is $150,000, you’ll pay $1,500 per point. That may be worth it based on the interest rate you’ve been offered
  • If your mortgage is $400,000, each discount point costs $4,000. You may be less inclined to buy down your rate in this scenario

While points are more expensive for bigger mortgage balances, you also save more per year by dropping your rate. To see if points are worth it, verify how long it will take to recoup that cost via lower interest.

Points are a bit of a double-edged sword.

On the one hand, they can make advertised rates a bit misleading. But, if you have extra cash on hand, you may be able to negotiate points with your lender even if they’re already offering a fairly low rate.

In this way, you can save yourself tons of money in the long run.

APR

Whenever a company offers ultra-low mortgage rates, it’s also important to consider the annual percentage rate (APR).

APR refers to the total yearly cost of your mortgage, including the interest rate, loan origination fees, points, and other lender charges. But APR isn’t foolproof. It assumes you keep the loan for the full term, typically 15 or 30 years.

But it can be a useful tool to shop around for mortgages. It’s better to compare APR vs. APR rather than rate vs. rate.

If a lender charges substantial fees, or you have to pay points to obtain a low rate, you may be better off with a lender that offers a higher interest rate but lower APR.

Make sure you read your loan estimates carefully to fully understand the cost of each loan you look at — rates and fees included.

Wholesale lending

UWM is a wholesale lender, which means that it doesn’t advertise its loans directly to consumers. Instead, it works with mortgage brokers who promote its loan products to borrowers who might be a good fit.

Because wholesalers don’t have to market to and negotiate with consumers directly, they may have more flexibility in the rates they can offer.

If you’re interested in finding a wholesale lender — or don’t feel confident finding the lowest rate on your own — working with a broker could be a good option.

Should you work with a mortgage broker instead of buying direct?

When it comes time to apply for a mortgage, many people apply directly with banks and lenders, doing all the legwork themselves.

But you can also hire a mortgage broker to look for loans and submit applications for you.

That said, working with a broker doesn’t always guarantee you the best deal.

Pros of working with a mortgage broker

The big advantage of working with a mortgage broker is that they can source different loan options from a variety of lenders, based on your financial profile and the type of property you want to buy.

Basically, they do the work of shopping around so you don’t have to.

Brokers provide expertise and deep knowledge about what’s available in the market, and it can really help to have someone negotiating on your behalf.

You can save a lot of time through a broker as well, since you don’t have to spend hours researching different lenders yourself.

Cons of working with a broker

The big drawback, though, is that brokers represent a finite number of lenders.

If you choose to work with a broker, you can be sure you’re getting the best deal from the companies they represent — but you could be missing out on an even lower rate from one they don’t.

You’ll also want to find out how the broker gets paid before choosing one. Some mortgage brokers receive a commission from lenders, while others are paid by the borrowers they represent.

If you end up being the one to pay, you want to know exactly how much they’ll charge before you sign any agreements.

Who can actually get a 1.875% mortgage rate?

Just because a company offers sub-2% mortgage rates, doesn’t mean all borrowers will qualify for them.

Lenders always offer their most competitive interest rates to top-tier borrowers with excellent credit profiles.

Here’s what they look for:

  • Strong credit score: The best rates go to borrowers with excellent credit scores; typically 720 or above. A strong score indicates that you’re a reliable borrower with a track record of good money management
  • Good credit history: Lenders do a “hard” credit check when they run your application. They want to see that you’ve paid debts on time and haven’t defaulted on any accounts. You may still qualify for a mortgage with some credit faults, but you’re less likely to get ultra-low rates
  • Low debt-to-income ratio (DTI): Most lenders require your DTI to be 43% or less, though some will allow higher ratios. The lower your monthly debts, the lower your mortgage rate is likely to be
  • Down payment: The higher your down payment, the less debt you’re taking on (and the less debt the lender will take on). Therefore, a high down payment can help you secure a low mortgage interest rate

Not all borrowers will qualify for rates below 2%. In fact, it’s likely that very few will.

But many will qualify for rates in the low- to mid-2’s. A year ago, that would have been unthinkable.

So check with a few lenders, compare rates, and see what you qualify for. It might be lower than you think.

Find out what rate you qualify for. Start here (Dec 3rd, 2020)

Do your due diligence

There are so many decisions involved when you buy a home or refinance — not the least of which is choosing a lender. And there are no easy answers.

It’s a personal process that really comes down to what’s right for you.

The key is to always research your options before making a decision.

Even if you feel you need to choose a lender quickly to lock in today’s lowest mortgage rates, it’s important to read up on different companies and carefully compare your offers.

Don’t be swayed by shockingly low rates or an offer that seems too good to be true.

Always make sure you’re seeing the full picture before you commit to a lender or a home.

Verify your new rate (Dec 3rd, 2020)