Low Interest Rates: You Pay Extra So You Can Sound Smart

[Erik Browning]

"I got a 6.125% rate on my house because of my expert negotiating skills"

"Oh wow! I need to get like you and also get a 6.125%. How'd you do it Mr. Smart Guy?"

When you are on a never-ending quest to find the lowest rate so you can brag about it to your coworkers/friends/family, you are typically the one that is losing out and being played.

Let's look at this bank's advertising:

The fine print clearly states that "The interest rate above shows the option of purchasing discount points to lower a loan's interest rate and monthly payment." Additionally, they say that the rates are "as low as," and are discounted by 0.25%

Do you know what a discount point is? Maybe not. But what you do know is that you can tell your uninformed cousin/coworker/>40 men's softball league teammate that they are dumb af for getting a loan at a 6.5%.

Discount Points are a FEE. You pay this fee in exchange to buy down the rate. The lower the rate, the more you pay. Could that cash be used for something else - like your kids college fund perhaps? That's up to you. But you are probably wasting your hard earned cash that you probably don't have on buying down these discount points. Instead, you could save your cash and then refinance (for free) when the rates drop, which could be 6 months, 1 year, or some other time in the future. That cash you spent on buying down points could have been used for investing in your next property or securing your future.

This sheet is the current rates that are available from one of my lenders...

Look guys, this lender has a 5.5% - you just have to pay $12,000 for it!!!

Additionally, on top of the discount points you're paying for, you're also probably paying for what is called an "origination fee." This is the fee that lenders charge you to do the work associated with your loan. Typically 1%-3% of the purchase price.

So not only are you paying for discount points, you're paying for the origination fee as well.

If you want to know if you're paying all of these fees, look at the "Loan Estimate" that the lender you chose gives you. Ask them for it if you haven't received one. Specifically, look at "Box A"

The above image is a severe example of a freshly-cleaned, New Balance-wearing, goatee-man makeup having, upset-at-the-news neighbor that thinks he knows how rates work guy that knows it all that will do anything they can to tell his idiot neighbors in the cul-de-sac they... "got a terrible rate," without disclosing that they paid almost $14,000 in fees in exchange for that rate, just so he can be the smartest dad on the street.

If you don't want to pay the origination fee, well, then you are going to pay a slightly higher rate. It is was it is: there are tradeoffs for everything and nothing is free. Not even for you, Mr. "I took one semester of Accounting."

Now, if you've made it this far - what do you do?

1. Stop listening to your friends, family, and coworkers that know nothing about real estate. If they are the loudest about it, they probably know the least.

2. Instead of the rate, focus on THE MONTHLY PAYMENT. Does it really matter if you got a 2% rate on a monthly payment that you can barely afford? Get into a house that makes sense for your budget with regard to the monthly payment. And if you can't afford the monthly payment, well then you can't afford the monthly payment! When it comes time, refinance (for free) into a lower rate that further lowers your monthly payment.

3. Mortgage people are regulated by the federal government and we all have access to the same money. None of us have access to deeply discounted $$$$ that no one else has - it's all from the same pool with very similar pricing. If I have the lowest rate today, someone will have the lowest rate tomorrow. It's never ending and you will always find someone lower. Find someone that you trust and you feel is competent and work with them - this is a people business.

4. Ask for documents to support what they are telling you. A good lender is transparent up front - showing you not just the rate, but also all of the associated fees.