I’ve seen a lot of articles lately talking about how you can still get a sub-6% mortgage rate, despite the recent uptick.
We had 5% mortgage rates as recently as early March, but then they climbed back above 6.5% due to the conflict with Iran.
They’ve kind of been stuck there ever since and even threatened to go close to 7% before a deal was struck.
Despite all that, you can still get a 30-year fixed mortgage that starts with a “5.”
But is it actually worth the cost to do so?
Mortgage Rates Are Still Being Advertised in the 5s
If you go to a mortgage rate comparison site, or even look at the rates advertised on this blog, you’ll notice a lot of mortgage rates in the fives.
But if you dig a little deeper and look at the fine print, you’ll notice that there are mortgage points required to obtain those rates.
These points, technically known as mortgage discount points, allow borrowers to obtain below market rates.
They’re essentially prepaid interest that you can pay at loan closing to secure a lower interest rate.
But since you pay the points upfront, the monthly savings from the lower interest rate won’t absorb that cost for potentially years.
You Can Get a 5.75% Mortgage Rate Today But It’ll Cost You
For example, if you’re offered a rate of 5.75% today, which is arguably about 0.75% below the par rate (rate with no cost or rebate), you might be required to pay 1.5-2 points upfront.
A point is simply a percentage point so for every $100,000 you borrow to finance your property, one point is equal to $1,000.
If you take out a $400,000 loan, one point would be $4,000. If it’s two points, it’s $8,000.
You only get “paid back” via lower monthly mortgage payments, which absorb that upfront cost over time.
Eventually, you’re “winning” because you’ve paid back that upfront cost and your monthly payments are lower for the remainder of the loan term.
But this only works if you stay in the loan/property long enough to break even.
I created a mortgage points calculator that calculates this break-even period to help determine if it makes sense or not.
It includes how long you plan to stay in the property and an optional tax rate to really fine-tune things.
In our example above, it’d take about two years and eight months to break even if you bought down your mortgage rate from 6.5% to 5.75% for a cost of two points.
That’s not too bad as most would likely stay in the loan/property for at least a few years in most scenarios.
And to make matters even better, you can often get seller concessions (credits) that can be used to buy down your rate. So it doesn’t necessarily even come from your own pocket.
It Depends What Happens with Mortgage Rates
Before you look at the math and think this is a no-brainer, I’ll surely stay in the property for 2-3 years, there’s another factor to consider.
What if mortgage rates fall back to the 5s or even lower in the next few years?
At that point, you’d have the chance to apply for a rate and term refinance to lower your rate, potentially without any cost.
That would mean that the potential savings would be lost, or that you didn’t actually need to pay thousands of dollars upfront for a lower rate.
Instead, you accept today’s par rate and wait for rates to improve, at which point you take advantage of a refinance.
Of course, lower rates aren’t a sure thing and could actually rise from here, at which point paying to buy down a rate to the 5s would look genius.
Another alternative is to go with a completely different loan program, such as an adjustable-rate mortgage.
Both the 5/6 ARM and 7/6 ARM offer a fixed interest rate for the first five to seven years before the first rate adjustment.
During that time, if rates fall you can refinance. If they’re more or less flat, you can keep your ARM after it adjusts.
Or perhaps you move at some point during those years. The only thing you’d really need to worry about would be if mortgage rates unexpectedly skyrocketed.
