Mortgage Borrowers Beware - Some Lenders Are On a CONQUEST to Take Your Money

“The basis of any scam is telling people what they want to hear. If something sounds too good to be true, it probably is.” – Lee Child

As consumers, we do our best to determine if we are getting a fair deal. We check with our friends and family, research online, and in the end we make the best decision we can – often taking the advice of industry professionals.

We are aware we have a finite amount of time to conclude our research and ultimately we make a judgement call using all the information we have. This is human nature, and we have to make decisions before we lose the most precious resource we have in this life – time.

Unfortunately, to really know what’s going on in the mortgage and financial industry right now you need to invest a ridiculous amount of time. Things are changing rapidly and the market is behaving unlike it has in the past due to the Federal Reserve’s seemingly endless quest to push interest rates toward zero.

This intervention into the mortgage market leaves you vulnerable to making a bad decisions due to lack of perspective. An environment like this breeds mortgage lenders who tell you what you want to hear rather than taking the time to educate you on the whole story. Before you know it, you are making poor decisions you will regret down the road.

This is exactly what is happening to home buyers who are applying for a mortgage and buying down their interest rate with mortgage points.

Let me share the common sales pitch with you so you can recognize it when you hear it.

“Some people said we’d never see interest rates drop below 3% on a 30 year mortgage, but it’s now available.

"We're proud to announce a program that’s going to change the game.”

These lenders may even come up with a fancy name for their new program that sounds like they are revolutionizing the industry.

Let’s peek behind the curtain so you know what’s really going on.

Refinances Are Happening Much Earlier

Mortgage loans are refinancing earlier today that any other time in history because interest rates are falling consistently – seemingly with no end in sight.

Mortgage lenders and servicers (institutions who collect monthly mortgage payments and handle escrowed payments for property taxes and insurance) are seeing their profit margins being slashed dramatically. This is because the industry is used to people holding on to their mortgage for an average of five to seven years.

Today, thanks to the Federal Reserve aggressively buying mortgage and Treasury bonds and in effect pushing interest rates lower, people are refinancing their home loans much earlier than the industry is used to – so early that many lenders cannot make a profit from originating a loan. To combat this, they have turned to charging massive up-front fees called points in exchange for below-market interest rates.

A point on a mortgage is 1% of the loan amount. Many lenders who are advertising interest rates below 3% are also charging between 2 and 3 points (sometimes even more, depending on the borrower’s credit score).

Let’s assume you currently have a home loan with a balance of $400,000 at an interest rate of 4% and you are considering refinancing to a lower rate. You encounter an advertisement from a mortgage lender who is touting a 2.5% interest rate on a 30-year loan. This sounds almost too good to be true, so you jump on the offer and move forward with the refinance.

However, when the paperwork comes you discover they are charging you 2.75 points to lock in the advertised rate. This equals an extra $11,000 in fees collected by the lender.

Now, if you are planning to keep that mortgage for the full 30 years, that’s likely not a bad deal. But let me let you in on the million-dollar secret… you are not going to keep that loan for 30 years.

Let me tell you why.

Interest Rates are Heading Lower

The graphs below are from the Federal Reserve Economic Data Bank of St. Louis (FRED)

Let’s take a look at 30-year mortgage rates going back to the 1970s. Do you notice a trend? Taking into account the last 50 years, do you believe that trend will reverse anytime soon?

It’s highly unlikely, and here’s why. The Federal Reserve has embarked on the most massive mortgage-bond buying spree of all time and they are buying mortgage bonds at a faster pace than ever before.

Below you will see the amount of mortgage bonds – a.k.a. mortgage-backed securities – owned by the Federal Reserve. You can see that, after making purchases during the Great Recession, they stepped out of mortgage bond buying and their holdings were diminishing.

At the far right of the graph (the year 2020) you can see their holdings skyrocket at the fastest pace on record.

Basically, the Federal Reserve is already buying down your interest rate. Why would you use the equity in your home (via points) to do what the Federal Reserve is already spending hundreds of billions of dollars to do for you?

A similar trend is occurring in the U.S. Treasury market. Below is a chart of 10-Year U.S. Treasury rates, which tend to move in the same direction as mortgage rates as investors typically consider buying mortgage and Treasury bonds at the same time.

The same question applies to this data: do you see any sign of the Treasury rate moving higher? It’s currently near its lowest level in history and is projected to move even close to zero as we continue to navigate the COVID-19 pandemic.

Again, these unusually low rates are due to the Federal Reserve’s buying of Treasury bonds.

Below is the chart of the Federal Reserve’s holdings of these bonds. Again, at the far right in the year 2020, the buying of these bonds is skyrocketing beyond anything we’ve seen in the history of the United States.

These two actions (the buying of mortgage-backed securities and treasury bonds) combined are a nuclear force intended to stimulate consumer spending by pushing long-term interest rates toward zero.

What Does This Mean For You?

Mortgages are being held for shorter time periods than ever before as the Federal Reserve does everything under its power to push interest rates as low as possible.

Paying points and ridiculous closing costs and fees is tantamount to heating your house with dollar bills – it’s going to look cool and keep you comfortable for a while, but bragging about your super-low interest rate to your friends will lose its appeal once everybody gets that rate at no cost.

Let’s also not forget that achieving a low interest rate is not the only reason someone will want to pay off their mortgage. According to Zillow, there are the top three reasons each generation decides to move homes.

A common thread connecting many of these events is that virtually none of them are planned. Sometimes life takes a turn and suddenly the “forever home” needs to be sold in a hurry.

When things like this happen, you can kiss the low interest rate and the home equity that you needlessly used up when you refinanced GOODBYE.

The Bottom Line

Yes, now is the perfect time to consider the interest rates and cash-flow implications associated with every loan you have. Forking out large amounts of cash in the way of loan origination fees or points would be extremely unwise when all signs point to interest rates going even lower.

This does not mean you should sit idly, however. I have counseled home buyers for years that the right mortgage strategy will always trump the lowest interest rate. By employing the right mortgage strategy, you can reduce the total cost of your loan over the time you will actually be in the home and simultaneously build the most amount of wealth (equity).

To help you decide what strategy is best, we’ve written an eBook titled Five Strategies For Refinancing Your Home – Everything Most Lenders Won’t Take The Time To Show You.

We know the mortgage process can be confusing and frustrating. Our goal is to make your refinance process as simple and fun as possible. We created this eBook to provide you with the information and tools you need to refinance your home with less stress.

You can download your free copy below.