Interest Rate Too Good To Be True?
Everyone has that friend who loves to brag about their great deals. He loves to tell you of his expert negotiating skills, he told you he sold the salesman, and how he swindled the swindler and they thanked him on the way out. Now, I’m no expert when it comes to certain things- but I do know about mortgages and when something sounds too good to be true, it probably is.
You see, mortgage rates don’t vary much from bank to bank. Mortgages operate based on how the bond market performs. In a nut shell, as the bond market goes up, interest rates go down. Since this is the case, lenders are at the mercy of the market and in fact don’t have much ability to adjust the interest rate other than by fractions of a percent.
Your friend might have talked himself down to an all-time low interest rate but he definitely paid for it. In order to get an interest rate that far below the market rate you must do a point buy down (1 point = 1% of the purchase price). If your friend bought a $100,000 home, and the market rate is 4%, then he bought the rate down 3 points for $3,000. That’s $3,000 that he didn’t need to pay and that much less money for home upgrades and repairs that may need done.
Unfortunately if your friend bought a better rate, it’s likely the loan officers were laughing at him as he walked out. Don’t fall into the keeping up with the Jones’ trap, it can be tempting but bragging rights aren’t worth the financial burden.