Here’s your EZ Mortgage Monitor, Mortgage Myth Buster edition!
The Mortgage Myths I’ll bust today:
- Mortgage Myth #1: The APR is your best loan comparison tool
- Mortgage Myth #2: It’s only worth it to refinance if you can lower your rate by 1%
- Mortgage Myth #3: Lender selects your rate and fee structure (bonus about closing costs)
I doubt you’ll see those Mortgage Myths if you ask Google. I don’t know where these mortgage myths came from. But they’re very much a part of mortgage lore. Maybe they’re from the banking industry? Designed so you don’t understand your real options, and they make more money off you.
First, let’s talk about APR. The almighty APR. Annual Percentage Rate. Most people focus on APR. Probably because our regulators focus on APR, and so the banking industry at large, does too. It can be a helpful tool to compare loan options on a superficial level. Or, if you actually remain in that loan for the full duration of the term (car loans, for example), without ever deviating from your scheduled payments, they can be useful on a deeper level. But how often do you remain in the same mortgage for the duration of your term? Rarely.
So here’s the math. After all, the good news about real estate financing is, it’s just math. There are no secrets nor hidden tricks. Here are a few comparisons, based on a client, who is buying a $665k home, with $290k down, with $375k financed, and a 679 fico. They are first time homebuyers, under the Area Median Income, so they benefit from some pricing waivers, but that doesn’t impact their loan options and comparison.
Option 1:
- 5.925% APR
- 5.25% note rate – what your payment is actually based upon
- $2070.56/mo, principal and interest
Option 2:
- 6.806% APR
- 6.625% note rate
- $2401.17/mo, principal and interest
Option 3:
- 7.154% APR
- 7.125% note rate
- $2526.44/mo, principal and interest
From the cuff, you’d say, “Hey, gimme option 1. That 5.25% with the lower payment and lower APR of 5.925% sounds sweet!!”
And, if you’re in that loan for the entire 30yr term? You’d be absolutely right. The lower rate, and lower APR always pay off, in the long run. In this case, you’d have to be in the loan for five years to make option 1 pay break even. Every month thereafter, you’re ahead.
Let’s look a little more deeply into the math.
For Option 1, you’re paying 5.125% more ($19,218.70) to get that 5.25% note rate, than you are for the 6.625% note rate option. Option 1 has 4.875% ($18,281.25) in “discount points” which are prepaid interest. At 6.625% you’re getting a lender credit of .25% ($937.50). Add the two together, and that’s the incremental cost, to achieve the incremental savings of the lower note rate, and APR.
So, that APR comparison masks the fact that to save $330.61/mo, you’re paying an incremental $19,218.70 today (if you even had that extra cash to throw at it). That will take you 58 months to make that back. Just shy of five years. Will these people be in this loan in five years? I doubt it. I could be wrong, but I believe the market will give them a cost-effective refinance opportunity somewhere in the next 12-24 months. There’s a saying, marry the house, date the mortgage. It makes sense.
Taking that a step further, at 7.125% the lender would give the borrower a credit of $7500, in exchange for the payment of $2526.44/mo. You could make a case to take that, as well. But, we felt the 6.625% was a nice balance to hedge, in case interest rates do stay higher for longer.
It’s critical when comparing your loan options that you’re informed of the full spectrum of your choices. That way, you can do the math between the incremental monthly payment, and whatever associated cost or credit you get, so you’re clear on your cost-recovery period. The APR alone does not tell you that.
Then, you’re able to choose the best option for yourself. We’ll always guide you based on what we would do in your shoes, but ultimately, it’s your money, and you’re the boss.
That brings me to my second Mortgage Myth Buster: It’s only worth it to refinance if you’re lowering your interest rate by 1% or more. That’s complete BS. To use a very technical term in finance.
I don’t know if some banker made that up, or more likely, it was a “rule of thumb” that gained traction when your average loan balance was relatively small, say maybe $100,000 or so. Again, it’s just math.
A typical refinance will incur costs of about $3500 for third party fees, including lender underwriting, title and escrow services, appraisal and county recording. It’s your choice how you cover those. You can pay them with cash, you can finance them and roll them into your new loan balance, or, you can choose a slightly higher interest rate, and earn a lender credit to cover them.
As you saw from the loan comparison above, every interest rate comes with a given cost or a credit. That’s been the case since mortgages were created. It’s nothing new. So, in the event of a refinance, you can choose to pay those third party fees (in cash or rolling them into your loan). You can choose to buy down your interest rate, adding incremental costs on top of the third party fees. Or, you can choose to take a slightly higher interest rate, and take advantage of that lender credit to offset your closing costs. That’s how no points, no fees loans are done.
Here’s another real life example of a client of mine. He was actually told by a banker – yeah, go figure – that he doesn’t like to refinance his clients unless he can save them 1.25% or more on their interest rate. Pardon me, but what a moron that banker was. Or just a liar.
I helped my client buy his home in November of 2023. And yes, he’d talked to that banker and some others at that time, and fortunately, he entrusted me with his financing on his purchase. He was at 7.375%. The window in which he bought his home, fall of 2023, was basically the high point in rates. His credit score was solid at 794, and he put 25% down. His principal and interest payment was $3263.44 on a $475k loan.
In September of 2024 – the lowest point we’ve seen in rates since about February of 2022 – we got him to 6.5% 30yr fixed, with a lender credit of $5373.45 offsetting his closing costs of $3447. We could have gotten him a little lower, but like a lot of people, he wanted to wait and see what the Fed did. They lowered the federal funds rate, and? Mortgage rates rose! As I was telling people they might.
Fortunately, my client still literally got paid to take that 6.5% rate. His payment went from $3263.44/mo down to $3002.32, saving him $260+/mo. He actually chose to take his balance back up to $475k, to basically pay for a nice vacation he’d planned, and still saved $260/mo. And got paid to do it.
He could have chosen a lower rate than 6.5%, but the incremental costs for the incremental savings just didn’t pencil out that well. I won’t be surprised if some time in the next year or so, we can do another no points, no fees refi down to 6%. If we can’t? He’s still $260/mo better off than he was.
Had he stayed in the old loan, he would’ve given the bank $2000 more during the last 8 months. And $260/mo more for every month thereafter, waiting for something that may or may not ever happen. And who knows when we’ll be back to that point in rates? He’s getting paid to wait. Crazy.
In this case, he did actually save almost a full percentage point. But that’s rare, honestly.
Let’s say he could have only saved half that, $130/mo. But if it’s no points, no fees? Not taking even that is like saying “Hey Eric, no thank you. I appreciate the offer. Please don’t send me $130/mo for however long I’ll be in that loan. I don’t need it.” That’s silly. If I sent you a check for $130/mo, no strings attached, would you cash it? Of course you would.
From there you might say, well, if you’re always refinancing aren’t you always resetting the term, and ultimately paying more than you otherwise would? The answer is maybe. It depends how you use those savings.
I tell my clients to just use that extra savings to apply to extra principal, basically paying the same monthly as they were before refinancing. Keep paying as you were, accelerating your principal reduction and loan payoff. For many people, $100-$200-$300/mo or even more, won’t really change how they live. But it’s magic if you apply that extra cash to principal (well, not really magic, it’s just math, but you get the idea).
And, that gives you the flexibility to put that savings in your pocket if you ever need to, vs. being forced to pay it to principal with a shorter term. But like anything, it’s your choice. How you use those savings is up to you. If you’re not as disciplined, to just habitually make the old payment, you can choose shorter terms. You can choose a term down to 8 years, in fact. So you don’t have to go “backwards” on the amortization. But, you lose flexibility in applying those savings elsewhere in your cash flow, if needed.
And finally, to bust the third Mortgage Myth, your lender does not choose your rate and fee structure. You do. Always. Every time.
All we do is show you the spectrum of your choices, from the lowest rate and highest cost loan, to the highest rate, lowest cost loan. It’s really that simple.
That’s why the industry’s regulators created the Anti-Steering Disclosure in the wake of the 2008-2009 mortgage market meltdown. We’ve always explained that dynamic to our clients, but not everyone does. If you or anyone you know has worked with a lender who didn’t clearly explain your spectrum of options, you’re talking to the wrong lender. You should call us.
For the bonus Mortgage Myth Buster, the bulk of the costs of your loan, whether a refinance or purchase, are not directly related to your lender and your financing. They are third party fees. Some of them are tangentially related, for example an appraisal and Owners’ Title Insurance, because lenders may require them, so you could avoid them if you chose to as a cash buyer, but they are paid to independent third parties.
Typically, you’ll have about $1200-$1500 in lender fees. That covers underwriting, and any other small service fees like tax service or flood certificates. Some lenders do try to make a few extra bucks with processing and doc prep fees, or other “service” line items. You should avoid those guys. We don’t add any junk fees. The appraisal is tangential to your loan costs, and that might be $750 or so. Title and escrow services are roughly $1200-ish on a refi, and maybe $3k-$4k on a purchase (depending on your loan size and purchase price). Title and escrow fees are on a sliding scale, so larger loans and purchase prices typically carry higher costs for those services. And finally, you may have transfer taxes. But regardless of that, your home purchase agreement with the seller designates who pays what portion of those.
So there’s three, maybe four Mortgage Myths busted. I hope you find this information helpful.
As we always say, an educated borrower will usually make the right decisions for themselves. That’s our goal. To give you the knowledge to be confident in your choices. There may always be someone cheaper out there, but there’s rarely going to be anyone better.
If you’d like to discuss any specific scenarios, feel free to call, text or email me, any time. I’m always happy to be a sounding board. You know I’ll tell you my thoughts and help you dig into the math, whether it’s what you want to hear, or not.
With that, here’s your snapshot of where rates started this week. Call or email if you, your family or friends have any questions or would like to discuss refinancing, or buying a home. Cheers!
E
| Conforming | Rates | Points | APR | Loan Amt | Payment | |
| 30 yr fixed mortgage | 6.500% | 0 | 6.550% | $ 300,000.00 | $ 1,896 | |
| 15 yr fixed mortgage | 5.750% | 0 | 5.800% | $ 300,000.00 | $ 2,491 | |
| 30 Yr fixed FHA mtg | 6.125% | 0.25 | 6.975% | $ 300,000.00 | $ 1,823 | |
| 30 Yr fixed VA mtg | 5.990% | 0 | 6.420% | $ 300,000.00 | $ 1,797 | |
| Jumbo (ask me about Super Conforming limit, per your zip code) | ||||||
| 30 yr fixed mortgage | 6.500% | 0.5 | 6.676% | $ 1,200,000.00 | $ 7,585 | |
| 15 yr fixed mortgage | 6.750% | 1 | 6.839% | $ 1,200,000.00 | $ 10,619 | |
| 5/6 ARM | 6.625% | 1 | 6.759% | $ 1,200,000.00 | $ 7,684 | |
| 10/6 ARM | 6.875% | 1 | 6.955% | $ 1,200,000.00 | $ 7,883 | |
| Rates subject to change without notice. | ||||||
| Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics (780+ fico, owner occupied SFR with 75% loan to value ratio or less and $200,000+ loan amount), your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. NMLS: 239756. Equal Opportunity Housing Lender. If you’d like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:eric@ezmortgages.us and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject. | ||||||