Mortgage Q&A: Check fees that go with note rate

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The latest updates in the world economic forum have been favorable to U.S. interest rates. The problems in Greece continue to pressure the demand for anything that has to do with financial instruments in Europe.

The byproduct of this situation is the flow of money into good ol’ U.S. Treasury bonds. As worldwide investors suck up our beloved American debt, the price of the debt goes up and the yield drops. Mortgage rates follow, albeit slowly. The yield on the 10-year Treasury bond fell to 1.8 percent last week - the lowest since last February.

After an early morning announcement of the Greek debacle, I anxiously waited for the mortgage rates to come out. Predictably, mortgage rates dropped, but not to the degree many would think.

I have told clients the same thing for 20 years: Mortgage rates are very slow to follow the 10-year Treasury bond down. But they are very swift to follow the yield up when it spikes.

The bottom line is that rates have fallen slightly. By the time this column is published, things could be different. I have dozens of refinancers in “the pipeline” with a locked interest rate, waiting for the cumbersome process to be completed so they may enjoy the benefit of this cheap money.

Their rate is locked, which protects them in case rates rise while their loan application is still in the process. When they hear that rates have fallen further, they invariably ask if they can get a better rate.

In some cases, I can offer some kind of float-down, which allows a locked rate to drop to a reasonable level if the market allows. Some mortgage investors won’t budge. Others have some flexibility. My choice of a mortgage investor depends on the borrower’s objectives.

I received a call from a client who inquired about a “float-down.” Indeed, we were able, and already had, dropped his rate from 4.25 percent to 4.125 percent with the same closing-cost credit of $3,800. He appreciated the float-down, but did mention that his co-worker had received a rate of 3.875 percent, although he admitted he didn’t know what sort of fees were involved in his co-worker’s loan.

I’ve said this many times before. A quoted interest rate is meaningless without knowing the fees.

I jumped on the website of mortgage giant Freddie Mac, which reported an average rate of 3.87 percent with an average of .80 percent in “points.” This means that a rate of 3.87 percent, on a $300,000 loan, for example, will require that the borrower pay standard closing costs, typically in the range of $3,200, plus .80 percent of the loan amount in points, or $2,400.

I’ve run the numbers a million times. A 4.125 percent rate with no costs beats a 3.875 percent rate that costs $5,600 any day of the week.

Before you get sucked into that seemingly great note rate, make sure you’re not throwing the baby out with the bath by paying $5,600 in fees.

Send email to henrysavage@pmcmortgage.com.

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