Explain this, how can a lower rate cost you more?
[https://www.housingwire.com/articles/uwm-1-99-30-year-mortgage-rate-comes-with-a-catch/](https://www.housingwire.com/articles/uwm-1-99-30-year-mortgage-rate-comes-with-a-catch/)
In: Economics
The article was short on details, but most likely its high fees associated with the loan. Or it could be that the lender wants you to “buy points” and prepay interest for a lower overall rate. Your rate is lower but your upfront costs are higher.
As the article said, that would be good if you’re going to stay for a long time. But not good if you’re going to try to sell in a few years, you won’t have the equity built up unless you had already put a shit load down at first.
For starters, that article is 100% an ad.
With that said, mortgages have a very low payoff for the bank and take a very long time to do so. If they cut you a loan for $300k at 2.25% interest over 30 years, they’re making ~$113k over the life of the loan.
This could be a problem for them because interest rates are SUPER low right now. If 5 years from now the going rate is ~5.25%, they are still out most of that $300k that they can’t give to someone else. Giving you such a good deal today means they’re giving up 3% in profits!
So, they make you a deal. For $10k more they’ll offer you a 2% interest rate. Now their total profit on the 2% loan will be ~$100k PLUS the $10k you paid TODAY.
If you use all 30 years to pay off the loan, you come out $3000 ahead, and the bank has that $10k to spend on someone else at a higher interest rate somewhere else.
But practically speaking, that never happens. What actually happens is that you either sell the home, pay off the mortgage, or refinance the home within about 10 years. They still keep the $10k you paid on day 1, and suddenly don’t care how long it takes you to pay them back since they made the bulk of their profits the day you closed.
If you refinance/zero the 2.25% loan in 10 years, their total profit will have been ~$60k.
If you refinance/zero the 2.00% loan in 10 years, their total profit will have been ~$53k PLUS the $10k you paid for it on day 1.
That puts the BANK ~$3k ahead on the deal if you pay off the loan early by selling the house, refinancing or just listening to /r/personalfinance and zeroing your debts early.
TL;DR: 2% is an insane interest rate and you 100% take the deal if you plan on making regular minimum payments for the entire life of the loan. If you’re the kind of person that freaks out about debt and will make double payments, or you plan on selling the house in 10 years, don’t pay for a lower rate as it’s a net loss.
The absolute best you could do is to refinance your house now for as much cash as you can get out of it, dump all of that cash into something that pays more than 2% per year (which is almost literally anything).
Meanwhile, spend the next 30 years telling /r/personal finance to screw off and never pay a dime over the minimum payments because 2% interest is basically free money.
Fees and costs imposed on the loan in order to get the lower rate, apparently especially if you don’t have stellar credit or you’re financing the usual amount (80%). These very low rates seem to work best for those with exceptional credit who are financing maybe 50% to 60% of the property’s value, and even then there are up front costs larger than you’d typically see.
Basically, the up front fees to get the low rate (sometimes referred to points) are more than the interest difference would be if you only stay for a few years. If you pay $5000 more up front to get the low rate, and the monthly difference is $50 then if you stay less than 100 months (about 8 years) then you’re effective interest payments will be higher.
Latest Answers