The Low Rate That Was Not What It Appeared to Be

A client came to Brandon Coll mid-process with a text from one of the largest mortgage companies in the country. They were offering 4.99 percent. Could Brandon beat it?

Brandon did not immediately try to beat it. He asked to see the Loan Estimate first.

What came back was exactly what he suspected. And then some.

What Was Actually in That 4.99 Percent Offer

The rate was real. Everything attached to it was the problem.

The competing lender was charging 2.625 percent in discount points to buy the rate down to 4.99. On this loan that came to $12,821 paid upfront at closing just to access that rate.

But it got worse. Despite this borrower having excellent credit, a low debt-to-income ratio, and a loan-to-value under 80 percent the competing lender was putting him into an FHA loan on a five-year ARM. FHA loans carry an upfront mortgage insurance premium. In this case that premium was $8,400.

Total upfront cost between the discount points and the FHA mortgage insurance premium: $21,221.

This borrower did not need FHA financing. He qualified easily for conventional. He did not need to buy down the rate with over twelve thousand dollars in points. He had the credit profile and the equity to avoid every one of those costs.

What Brandon Closed the Loan At

Brandon put this client into a seven-year ARM conventional loan at 6.125 percent with no upfront discount points. The client was simultaneously taking cash out and lowering his existing interest rate. Zero points. No upfront mortgage insurance because the loan-to-value was under 80 percent on a conventional program.

The competing lender's payment was $152 per month lower. That sounds like the competitor won. Here is why it did not.

The Math That Changes Everything

To recover $21,221 in upfront costs at a savings rate of $152 per month takes 139.6 months. That is nearly twelve years of making payments before the buyer breaks even on what he paid upfront just to get that lower rate.

If he refinances before then and rates come down the break-even point never arrives. If he sells before then the $21,221 is simply gone. The lower rate provided a monthly savings but the borrower would have had to stay in that exact loan for almost twelve years before the math tilted in his favor.

For the overwhelming majority of borrowers that break-even timeline does not align with their actual plans.

The Broader Lesson About Rate Shopping

Brandon makes this point consistently. Very rarely does he see a genuine need for discount points. There are situations where the math supports buying down a rate and when that is the case he will present it. But in most situations the right move is a clean loan at a competitive rate with no points and no unnecessary upfront costs.

The practice of quoting an attention-grabbing low rate while burying significant discount point costs in the fine print is not unique to this one competitor. It is common enough that every borrower who is rate shopping should be asking for the Loan Estimate before making any comparison.

The Loan Estimate is the document that shows the full picture. Not just the rate. The points. The fees. The loan program. The upfront costs. Everything that determines what the rate actually costs you to obtain.

What to Do If You Have a Competing Quote

Send Brandon Coll your Loan Estimate. He will review it, identify what is actually in it, and give you an honest assessment of whether you are getting a square deal or whether there are costs buried in that quote that change the comparison entirely.

Follow along and reach out anytime.

Sources

ConsumerFinancialProtectionBureau.gov
MortgageNewsDaily.com
FannieMae.com
Investopedia.com
BankRate.com