Mortgages
Record low mortgage rates make August a hot time to buy or refi
Mortgage rates are incredibly cheap this August, with two well-known types of home loans hitting new record lows already this month.
The average cost of a 15-year fixed-rate home loan fell to 3.68% in our first weekly survey of major lenders, breaking the previous record low of 3.79% reached on June 8.
The average introductory rate on a five-year adjustable-rate mortgage -- a home loan on which the initial rate remains fixed for the first five years and then changes once a year after that -- fell to 3.23%.
That breaks the previous record of 3.34% established just last month.
The average cost of a 30-year, fixed-rate mortgage, the most popular type of home loan, didn't set a new record.
But it was down to 4.45%, a new low for 2011 and within 12-hundredths of a percentage point of its all-time low.
You can see exactly how little home loans cost in your area by searching our extensive database of the best mortgage rates from hundreds of lenders.
You’ll find banks and mortgage companies in most markets offering 30-year, fixed-rate home loans for as little as 4.25%, or even 4.125%, with no points and application fees of less than $2,000.
The principal and interest payments on such a home loan would be less than $500 a month for every $100,000 borrowed.
Our mortgage calculator can show you the payment for any fixed-rate loan.
If these rock-bottom rates aren't low enough for you, there's another way you can get even lower interest rates.
Consider buying down your rate by paying for "points."
Points are an extra charge you pay when you get your loan, in exchange for a lower interest rate and thus lower monthly payments.
You can think of them as prepaid interest. In fact, the IRS does.
That's why you can deduct points as mortgage interest in the year you purchase a home. If you pay points to refinance, you can still deduct the points, but you must do it over the life of the loan.
Each point you pay is calculated as 1% of the amount of the loan. One point on a $100,000 loan is $1,000.
If you can afford to pay points upfront and you keep your original loan long enough, buying down your interest rate can be rewarding.
You can use our mortgage points calculator to see just how much you can save.
The key consideration is not the difference in monthly payments, but how long you'll have to stay in this home, with this mortgage, to recoup what you've paid in points.
Let's say, for example, that you are going to take out a 30-year fixed-rate mortgage and have the choice between:
- Paying $2,000 for 2 points on a $100,000 loan that will cost 4.00% or…
- Adding that $2,000 to your down payment so that you're only borrowing $98,000 and paying 4.25%.
The monthly payment on the loan with points would be about $5 less and it would take between 12 and 13 years for you to recoup the cost of your points.
That’s a long time to stay in the same home with the same mortgage. Homeowners typically move or refinance every seven years.
But buying down your interest rate makes more sense when interest rates are at historic lows, as they are right now.
With the kind of deals we're seeing today, it's unlikely that even lower interest rates will tempt us to refinance anytime in the near, or even distant, future.
One final thought.
There are a couple of reasons you should always pass on points.
First, you should never deplete your emergency fund to come up with money for points. Living without at least six months' worth of living expenses is living far too dangerously.
If something goes wrong -- you lose your job, become ill, or just hear expensive sounding noises coming from your car engine -- you'll wish you'd planned ahead and kept that money in a safe place.
It also makes no financial sense to pay for points if you carrying high-interest debt such as credit card balances.
In our example, you'd save far more by applying that $2,000 to debt that's costing you 18% a year, than using it to save a few tenths of a point on your home loan.
If you're ready to take the plunge, our 6 simple steps to the best possible mortgage can help you find the cheapest deal on a loan and navigate the application process like a pro.
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