As a mortgage broker, the most common question I hear is “Where are rates today? Well, the answer is not a simple one. Why? Because there are so many variables that must be considered for each individual that there really isn’t a one size fits all rate. Factors such as loan amount, number of years, amount of equity and borrower FICO scores are usually the most important variables that come into play, and those are unique for nearly every borrower.
While many mortgage lenders tend to advertise and push rates that are relatively low in order to drum up interest, what is often in the fine print are the costs associated with that loan – in other words, an interest rate that is priced with an upfront rate premium that is due at closing. (Often referred to as “points”.) A rate “at par” is the rate that the lender offers that carries no rate premium due at closing. (Learn more about par rates here) Conversely, most lenders offer somewhat higher rates priced with a lender credit that could offset some if not all of the costs associated with refinancing.
Which is better: paying a premium up front for a lower rate or getting a higher rate at no cost (or even with a credit)? As always, it depends. You should do some quick math to see how long it would take to recover the upfront premium paid. It’s very simple: divide how much you will pay up front by how much you will you save in lower monthly payments. For example, $2000 in points that saves $11 per month in payments will take 181 months (a little over 15 years) to recoup. That may make a lot of sense in the long run, but consider the average homeowner holds a mortgage for approximately 7 years before selling or refinancing, and all of a sudden that doesn’t look like such a great deal.
When exploring refinance interest rates, you should first see how your current rate compares to par. If you are .25% above par or higher, you should reach out to see if there is a chance to save a lot of money on your monthly mortgage payment. You might be able to lower your payment with an interest rate that comes with enough of a lender credit to completely offset any loan costs you might incur, making a refinance a true “no-brainer”!