Mortgage Q&A: Lower rate not always better deal

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The calls are coming in. Calls from all of my refinance clients who patiently and politely have given Erin, my assistant, all the excessive paperwork needed to close their refinances. Of course, I get the calls:

Henry, I just saw in the paper that mortgage rates are now at an all-time low at 3.39 percent. You have me locked at 3.625 percent. It appears your rates are too high.”

I close my eyes and take a deep breath. I know the drill. I click on the website of mortgage giant Freddie Mac and find the weekly mortgage-rate survey. Sure enough, the average 30-year fixed rate is 3.39 percent. The newspaper is correct.

But it also is incorrect. It reminds me of a politician who’s trying to get elected. What he or she says might be true, but with the absence of other relevant information, the statement is incomplete, which makes it inaccurate. While the average 30-year fixed-rate mortgage is 3.39 percent, the reporting newspaper fails to mention that the average lender “fees and points” to get that rate were .70 percent.

My client is refinancing a $360,000 loan. I locked in his rate at 3.625 percent with no lender fees, no points, no origination charges and no third-party closing costs. In Virginia, third-party closing costs, which include items such as appraisal, credit report, settlement agent fees, title insurance and state recordation fees will total about $3,400.

I point this out to my client. I also point out that Freddie Mac’s survey indicates lender charges of .70 percent, or $2,520.

With all the information, the 3.39 percent “average 30-year fixed rate” will, in fact, cost my client $5,920. I point this out to my client and run the numbers.

A $360,000 loan at 3.625 percent will result in a monthly principal and interest (P&I) payment of $1,642. If we take the reported average rate of 3.39 percent with the average fees of $5,920, the P&I payment is $1,621 with an increased loan balance of $365,920.

While I concede that rates have dipped modestly and perhaps will continue to do so for a while, I ask my borrower if he’d rather raise his debt by nearly $6,000 to lower his payment by just $21 per month.

His answer is immediate. Carry on with the refi, he says.

Today’s lesson is simple: A quoted interest rate means nothing unless you also are quoted the cost of obtaining the rate.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.

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