Mortgage Rates Drop, Discount Points Double Since 2007

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via: TheMortgageReports.com/Dan Green

Mortgage rates have been on a multi-year downward trajectory. Conforming mortgage rates, FHA mortgage rates, jumbo mortgage rates -- everything has dropped As recently as 2006, 30-year fixed rate mortgage rates in the 6-percent range were common.

Today, the best rates 30-year fixed rate mortgage rates are closer to 4.

However, as mortgage rates have dropped, mortgage costs have climbed. It's the start of a trend that should carry forward for the next few years.

 

Freddie Mac's Required Discount Points Have Doubled

Each week, government mortgage-securtizer Freddie Mac publishes its Primary Mortgage Market Survey. The survey gathers "current mortgage rates" from more than 125 U.S. banks, and averages them into a "national mortgage rate".

The survey charts the actual mortgage rate offered by banks, as well as the number of discount points banks require to get access to said rate.

Discount points are "prepaid interest"; upfront fees paid in exchange for lower mortgage rates. The more discount points paid on a given mortgage, the lower its mortgage rate will be.

For example :

• A mortgage rate at 4.250% may have 0.00 discount points
• A mortgage rate at 4.000% may have 0.50 discount points
• A mortgage rate at 3.750% may have 1.25 discount points

There is often no limit of how many discount points you can add to a mortgage, but at some point, it becomes cost-prohibitive. Your loan officer can help you with the math.

 

In terms of costs, 1 discount point is equal to 1 percent of your loan size and is a fee paid up-front, at the time of closing. Discount points can be paid with cash, or added to your loan balance, if that's your preference.

As an example of how the math discount points work, assuming that you live in San Jose, California and your loan requires 2 discount points, if you borrow up to the local conforming loan limit of $625,500, your discount points would increase your closing costs by $12,500.

Since 2007, mortgage rates have fallen by one-third. During the same time, however, the number of discount points required to get Freddie Mac's "published rates" has doubled.

Today's low mortgage rates are still a great deal -- they're just coming at a higher cost than you might remember.

 

The Psychology Of "Low Rates"

There's no big secret why the average number of discount points is rising nationwide. It's a psychology thing. Human Nature and the hunt for the "absolute lowest rate, guaranteed" has helped it happen.

See, as mortgage rates have dropped, and as the internet has become a legitimate place to shop for a loan, the business of mortgage origination has become more democratic. Customers have a plethora of mortgage rate options these days, and no shortage of outlets.

It's a Rate Shopper's World and the lenders are just living in it.

It took some time for banks to learn this but now they know. So, rather than take their customers for granted, banks are taking them for naive instead. Wow the shoppers with a low, low rate -- load up the discount points -- and hope no one knows the difference.

Sadly, it's been a viable strategy.

Freddie Mac's average discount points have been rising since 2007 even as mortgage rates fall. You can get a loan for cheap, but it's going to cost you more than ever before.

Don't Want To Pay Discount Points? Good.

Don't worry about what Freddie Mac says. Paying discount points is optional. Banks can quote you rates that include big discount point payment, but it's up to you whether you want to actually pay them. It many cases, you won't want to because it won't make sense.

For example, if you plan to move or refinance within the next several years, you may find that it's better to waive your discount points for a higher mortgage rate. You may pay an additional 0.250% on your mortgage each year because of a higher interest rate, but you'll eliminate that big up-front cost that may never be recouped.

Know all of your options -- not just your Freddie Mac ones. Remember to get your mortgage rates quotes with and without discount points.