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Estate Mortgage Rates, Points, and Fees
Real Estate Mortgage Rates, Points, and Fees
Freddie Mac pushes a lot of numbers, and one of the numbers they push
is perhaps one of the most widely published - their weekly interest rate
survey. Freddie Mac has people who contact 125 lenders or so, get their
rate quotes on different real estate mortgage programs, specifically the
30 and 15 year fixed, 5/1 hybrid and 1-year ARM, then publish those
averages for all to see.
Not a bad way for the consumer to get a handle on just how their current
or quoted interest rate stacks up with the rest of the country. Just this
past week for example, the 30 year fixed rate average as reported by
Freddie Mac was 6.58 percent, with 0.5 percent in points and fees.
This means the "average" real estate consumer in this poll got a 30 year
fixed rate at 6.58 percent and paid $1,000, or 0.5 percent on a $200,000
loan, in either discount points or lender fees or any combination thereof.
Okay, that's pretty neat by itself. Nice of Freddie to do that.
Freddie has been doing this for a long time, since 1971. Nixon was
President then. The highest this rate has ever been was 17.48 percent in
1982 (can you believe it!) and the lowest recorded was 5.23 percent in
But looking a bit deeper into those numbers, one trend is also definite:
People are paying less and less in points and fees to get those rates. In
fact, if you go back twenty years, the average points paid on a 30 year
real estate mortgage was 2.3 points paid on every 30 year mortgage. On
Again on a $200,000 loan that's $4,600. Okay, yeah rates were higher then
(10.89 percent) so people paid more to get a lower rate but that doesn't
explain why when rates were 10.39 percent in 1979 real estate consumers
only paid 1.6 points. But enough of those numbers, the important point is
- why pay any points at all?
Clearly, consumers are paying less at the mortgage pump. Point-wise. Why?
I've got a good guess - because rarely does paying points, or origination
fees for that matter, make good financial sense. At least in getting a
return from the points paid. And more importantly, consumers might just be
finding out that paying points is an option and not a requirement.
A discount point, at 1 percent of the loan amount, usually benefits the
borrower by .25 percent. For each point paid, the borrowers rate is
reduced by .25 percent. At least that's the way it should generally work.
For instance, on a standard 30 year fixed rate today at 6.50 percent with
a $300,000 loan the payment would be $1,896. At no points. Now pay one
point and get a .25 percent lower rate at 6.25 percent and the monthly
payment drops to $1,847, or $48 lower. But that lower payment costs
$3,000. Tax deductible usually, but still $3,000.
If you divide that $3,000 by the $48 monthly savings it would take 62.5
months to "recover" that discount point paid at purchase. That's a long
time in my book. One could take that $3,000 and put it into a retirement
fund or something and get a better return. Or even take the $3,000 and
make a principal pay-down with that same money.
But often the trade-off between discount points and lower payments rarely
makes sense. For that matter, so does paying an origination fee. An
origination fee is also typically 1 percent of the loan amount and is also
an option and not a requirement.
Every loan that I know of doesn't automatically require you to pay an
origination charge. Heck, in certain parts of the country origination fees
are mostly unheard of. In certain parts of the country where origination
charges aren't common the rates are the same there as they are anywhere
This means that when getting a rate quote or deciding whether or not to
pay points or origination charges, think hard. Points and origination fees
don't have to be a part of the equation. They can, and should be, a