While long-term interest rates have risen from the record lows of past months, they still remain quite low by historical standards. However, as UrbanTurf has written in previous posts, the rates announced by Freddie Mac each week are not quite as good as advertised, as they usually carry points with them.
Points are essentially a form of pre-paid interest on a loan. When Freddie Mac issues its mortgage rates each week, the published average usually includes an average “point” that the lender will charge. That point translates into a percentage of the total loan that the borrower must pay up front in order to get the latest interest rate. For example, if a borrower is looking to get a $300,000 home loan and mortgage rates are at 4.2 percent, with 0.8 of a point as the average, that means that they will have to pay 0.8 percent of the total loan amount ($2,400) up front to get the quoted rate. (Of course, a variety of other factors — credit score, down payment amount — also play into getting the lowest rate available.)
Conventional wisdom is that it takes somewhere in the 5 to 7 year range to recoup the point that you would pay upfront on a loan, which is good for buyers to keep in mind when they are envisioning how long they will live in the property they are purchasing. For example, say that you want to take out a $400,000 home loan and you have the option of a 30-year fixed-rate mortgage at 3.9 percent with no points or 3.6 percent with 0.8 of a point. Monthly payments on the first option would be $1,922. After an upfront payment of $3,200, payments on the second loan would be $1,854. The time it would take to make up the difference between the two loans is 47 months or about 4 years.
In today’s mortgage market, however, it is not out of the question to find a great rate on a conventional loan that does not carry any points. A borrower just usually needs to have a very good credit history and be able to put 20 percent down.
For more on mortgage points, particularly as they relate to taxes, click here.