by Maurie Backman | Updated July 19, 2021 - First published on Aug. 21, 2020
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When a deal seems too good to be true, it usually is.
When the average 30-year fixed mortgage fell below 3% and the average 15-year loan dropped below 2.5%, it was newsworthy. And now, borrowers have an opportunity to score an even lower mortgage rate.
United Wholesale Mortgage is currently offering a rate as low as 1.875%. But before you get too excited about locking in that rate, here are a few things you should know.
Though United Wholesale Mortgage is offering rates as low as 1.99% for 30-year loans, if you want to lock in a rate of 1.875%, you'll need to be prepared to take out a 15-year mortgage. With a 15-year mortgage, you'll not only lower your rate slightly, but you'll also save a lot of money on interest by repaying your mortgage in half the time it would take with a 30-year loan.
But there's a reason 30-year mortgages tend to be more popular than 15-year loans: Not everyone can afford the higher monthly payment that comes with a 15-year mortgage. Depending on your budget, you may not be able to swing those higher payments.
Whether you're looking to lock in United Wholesale Mortgage's 1.99% rate or 1.875% rate, it won't come for free. Specifically, you'll need to pay points on your mortgage up front to lock in that rate.
Points are a fee you pay when you close on your mortgage, and each one equals 1% of your loan amount. Typically, one point lets you shave 0.25% off of your mortgage rate. It's possible to come out ahead financially by paying points on your mortgage, but generally, that only applies if you stay in your home for a number of years after closing on your loan. You'll need to stay in your home long enough for your monthly payments to cover that additional initial cost.
Let's say you're taking out a $200,000 mortgage. Average rates today for a 15-year loan are hovering between 2.5% and 2.75%. To lower your rate to 1.875%, you might need to pay three points, or $6,000 ($2,000 per point times three points). That's on top of your standard closing costs. If you don't plan to stay in your home all that long, you probably won't recoup that $6,000.
If you're looking to buy a starter home, or you're unsure of your longer-term plans, then buying points for a lower rate may not make sense.
Mortgage lenders don't tend to hand out their best rates to just anyone. While you may not need a perfect credit score to qualify for a 1.875% rate, you will need a really good one -- probably in the mid to upper 700s at a minimum. If your credit is good but not outstanding, you can expect to pay more for your home loan.
Of course, there are steps you can take to boost your credit score quickly, like paying off a large chunk of an existing credit card balance to lower your credit utilization, or requesting a credit limit increase to achieve the same goal. But even so, you should know that credit scores generally don't update overnight. Even when positive activity is reported to the three major credit bureaus, it can take a good 30 days for it to be reflected in your credit score, and frankly, we don't know how long that 1.875% rate will remain available.
Could you snag a 1.875% rate on your mortgage? It's certainly possible, but you'll face the hurdles above. And even if you don't manage to lock in a loan at 1.875%, you should know that mortgage rates in general are very competitive these days. If your credit score is in good shape, there's a solid chance you'll still manage to snag a great deal.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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