April 17th, 2023 3:40 PM by Sam Kader MLO130505
Mortgage rates have been hoovering at historic lows recently up until end of last week - 8/14/20. An advertised mortgage rate for a Conventional 30 Year Fixed at 1.99% is definitely catchy but there is a catch that you must know. The key concept that will help us understand the advertised 1.99% rate is that of upfront costs or discount points vs interest rate.
In the mortgage industry, the finance charge has a direct bearing on your rate is referred to as discount points. A point refers to a percentage point of the loan amount. For example, 1 discount point (1%) on a$300,000 loan would amount to $3,000 in upfront additional closing costs. Lenders are in the business of profiting from your loan. They are getting it either upfront at closing or over time as you are making your house payments. For example, the below options are equally profitable in the eyes of the lender:
Option 1: You opt to paying 0 point and your rate is 2.75% (*APR 2.769%).
Option 2: You opt to paying 1 point and your rate is 2.50% (*APR 2.597%).
Option 3: You opt to paying 2 points and your rate is 2.125% (*APR 2.298%).
Option 4: You opt to paying 2 to 3 points and your rate is 1.99% (*APR 2.201%).
In conclusion while it's possible to advertise mortgage rates at 1.99% with multiple discount points, by the time the upfront finance charges are factored in, pursuing such a rate may not make sense for the average borrower.
* Loan amount is $510,400, 740 FICO score and standard closing costs.