How to Get the Lowest Mortgage Rate

March 28th, 2024

special sale only this week

Clients always ask me how to get the lowest mortgage rate. Especially given the fact that interest rates have increased since 2022 after having been at record lows for so many years prior to that. Many people think mortgage rates are high currently. However, interest rates today are historically quite average. We were just spoiled with cheap money for a very long time from just after the economic debacle of 2008 through most of 2021. What I see now is an almost carnival like atmosphere of people hawking quick fixes to get “special” mortgage deals.

But mortgage rates are not that high, and don’t require quick fixes. Read this article to see more about historical interest rates and why today’s interest rates are only slightly above average.

However, perception is real. And today many people think rates are high. And there are a lot of questions about how to get the lowest mortgage rate. Mortgage borrowers ask about Adjustable Rate Mortgages, and buydown mortgages.

Adjustable Rate Mortgages

Adjustable Rate Mortgages (ARM’s) are currently not a beneficial choice. They are not an option to get lower rates than a fixed rate mortgage. The current inverted yield curve means that short term rates like ARM’s are the same or higher than fixed rate mortgages.

The 2 Year Treasury was at 4.595% when I checked recently. And the 10 Year Treasury Note was at 4.233% when I last checked. That demonstrates the inverted yield curve perfectly! The 2 Year Treasury should be lower than the 10 Year Treasury. Obviously, an adjustable rate mortgage isn’t a wise choice if the rate is going to be the same or higher than a fixed rate mortgage.

Temporary Buydown Mortgages

How about a buydown mortgage? A buydown can be a 3-2-1 buydown, or a 2-1 buydown. These are considered temporary buydown mortgages. You are only buying down the rate for a few years. Or you can permanently buydown the rate by paying discount points, which I will discuss later. Below are examples of these temporary buydown mortgages.

3-2-1 buydown

First year: the interest rate is 3% below the market rate.

Second Year: the interest rate is 2% below the market rate.

Third Year: the interest rate is 1% below the market rate.

Years 4-30: the interest rate is set at the market rate.

2-1 buydown

First Year: the interest rate is 2% below the market rate.

Second Year: the interest rate is 1% below the market rate.

Years 3-30: the interest rate is set at the market rate.

To get the lower rates in the early years of a 3-2-1 buydown or a 2-1 buydown discount points must be paid. Fannie Mae and Freddie Mac require those discount points to be paid by the seller. And the discount points will be very expensive. The cost will vary according to numerous factors.

Real World Analysis of 3-2-1 and 2-1 Buydown Mortgages

How Does this Mortgage Work?

The money to pay for the discount points for a buydown mortgage goes into an escrow account held by the loan servicer. The escrow account is used to pay for the discounted rate in the first few years of the mortgage. If you refinance before the buydown is over, that escrow account balance is released to you because it is considered your money.

Sellers Usually Won’t Pay the Cost of a Temporary Buydown

Most sellers these days will not want to pay discount points for a buyer. Since there’s such low housing inventory there are usually multiple offers for a home. Sellers can pick and choose from better offers. So that puts a buyer’s offer at a big disadvantage if they plan to ask a seller to pay discount points. If the market flips to a buyer’s market that may change. There are a lot of home builders that use buydown mortgages to appeal to new construction homebuyers, however.

You Are Overpaying For the House to Briefly Subsidize Your Mortgage

Why would you ask the seller to pay expensive discount points when every mortgage holder is going to be looking to refinance as soon as they can? Even though you get your temporary buydown money back if you refinance, the seller or builder that’s agreed to pay those discount points for your buydown mortgage simply built the cost they paid into the purchase price. That means you will have effectively financed the buydown into the price of the home. If you get a hunk of money back from your buydown escrow account because you’ve refinanced, at least you’re getting your money back, right? So, it’s found money, right? What’s the problem?

Refinancing Means Buydown Costs Could Be Wasted

Again, the amount of the buydown was financed into the house price and mortgage. This means you’ll be financing your buydown for the life of the mortgage, even after a refinance. Most people will take the found money that was sent to them from the buydown escrow account refund if they refinance, and spend it on a vacation, credit card paydown, or new furniture. That amount of money would most likely not be put back into the mortgage or invested. So now you would have financed a vacation or a couch and love seat into a long-term mortgage. It isn’t wise.

Builders, realtors, and mortgage lenders who are selling buydown mortgages will tell you that you could simply take your buydown escrow account refund and pre-pay the mortgage when refinancing to lower the mortgage balance. The practical reality is that nobody will do that. The money will get spent on something else. And you will have paid an inflated price for a house to get a temporary benefit on your monthly payments.

Your Property Taxes And Homeowners Insurance Will Be Slightly Higher

Another problem with a temporary buydown mortgage is that you still paid an inflated price for the house. You can never get that back. Your property taxes and homeowners’ insurance costs are based on that inflated price as well. That creates a slightly inflated cost for those two housing costs into perpetuity.

A Temporary Buydown Mortgage Does Not Help You Qualify

When you get a temporary buydown mortgage, you qualify at the end fixed rate. You do not qualify for the mortgage at the start rate. Hence, a temporary buydown mortgage does not even help you in qualifying for a mortgage.

What Is the Best Choice?

I think the better option is to find the best fixed rate that you can, with zero discount points and skip the buydown. A fixed rate mortgage is an insurance policy against rate increases. And when rates come down, you refinance. It’s just that simple. All the teeth gnashing over allegedly high fixed rates that leads to the temptation of a temporary buydown mortgage results in spending lots of money to get a very short-term benefit. The result is usually wasted money.

Permanent Buydown Mortgage by Paying Discount Points

There are times when a homebuyer will permanently buy down the rate simply by paying discount points. This would not be part of a 3-2-1 buydown mortgage or 2-1 buydown mortgage. This would simply be getting a lower fixed rate over the full term of the loan by paying discount points to buy down the fixed rate. This is considered a permanent buydown.

But when you consider the possibility of refinancing, the same problem happens with a permanent buydown as with a temporary buydown. If you refinance too soon, you will have wasted a significant amount of money that was initially spent on discount points. Paying discount points to buy down the interest rate can take 4-5 years to recoup the cost. If you are not going to have any true savings until after 4-5 years, you have to wonder if you will be refinancing within 4-5 years. If you do refinance within that timeline, paying discount points is a waste of money. Again, I believe the answer for the best mortgage is to take the best fixed rate with zero discount points that you can, and refinance as soon as you can.

My answer may change when the yield curve un-inverts, and flips back to normal. If we get to a mortgage rate environment where a long term 5 or 7 Year ARM is 2% lower than a fixed rate, depending on your circumstances, my answers will likely change from the above!

Conclusion

Do you still have questions about getting the best mortgage? Contact me to discuss loan programs, your qualifications, mortgage rates, and other home buying and mortgage questions. Click here to schedule a call, or you can email me directly.

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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