You’ll Have to Pay Points to Get the Best Rate in 2012

Note: This story has been updated for 2012. We have adjusted the mortgage rate information and other points within the article to make it more relevant and useful for home buyers in 2012.

At the start of 2012, we are still enjoying some of the best mortgage rates we’ve seen in years. As of January 10, the average rate for a 30-year fixed loan was 3.91% (according to Freddie Mac’s market survey). This is certainly good news for home buyers. But many buyers don’t realize what it takes to qualify for those rates. In fact, many of the people I’ve spoken to by email are surprised to learn that the rates advertised on a lender’s website don’t apply to everyone across the board.

“What do you mean you can only give me a 4.8% interest rate? I saw 3.95% offered on your website.” Answer: Welcome to the world of teaser rates. Lenders will typically advertise their very best offers on their websites, in order to lure in more business. But in reality, only the most well-qualified borrowers will be offered the best mortgage rates in 2012. And believe me, this is a small and “elite” group — probably less than 25% of all borrowers. These are people with excellent credit scores (north of 760), sizable down payments, and minimal debt. Does this describe you? If so, you may very well qualify for the best rates in 2012.  Otherwise, you might have to set your expectations a bit lower.

Essentially, you can forget about the rates advertised on the lender’s website. They are not very useful when it comes to comparison shopping. You need to find out what they are willing to lend you, based on your particular qualifications. And you may have to pay “interest points” at closing, in order to lower the rate over the long term (more to follow on this).

A Crash Course in Mortgage Rates

Here’s what you need to know about qualifying for the best mortgage rates:

  • The average rate on a 30-year fixed rate mortgage has been hovering below 4% since December 2011. By way of comparison, at this time in 2008 the average rate was over 6% for a 30-year loan.
  • Rates are expected to remain low for most of 2012 — but probably not this low. I predict they will remain below 5% for most of the year, and slowly rise thereafter.
  • Not everyone can qualify for the best mortgage rates, though. Some people may get an even lower rate, while others will have to pay more interest on their loan. It depends on (A) how well qualified you are in the eyes of the lender, and (B) how much money you bring to the table at closing.
  • If you want to get the lowest rates available, you’ll probably have to buy points at closing. One point is equal to one percent of the loan amount. When you pay points up front, you can secure a lower interest rate on the loan. Some buyers use this strategy to save money over the life of the loan (by reducing the interest and thus the size of the monthly payment).
  • According to the Wall Street Journal, home buyers who secured the best rates on fixed mortgages had to pay, on average, 1.17 points at closing. On a loan of $250,000, this would mean paying $2,925 in points at closing (250,000 x .0117).
  • To qualify for the best rates, you’ll also need to have an excellent credit score (defined here). You’ll need to meet the lender’s definition of a “well-qualified borrower” in other ways, as well. Generally, this means having a FICO credit score of 760 or higher, a down payment of 10% or more, and a favorable debt-to-income ratio.

Buying a home in 2012 could be a smart move, as far as your interest costs are concerned. If you can meet the lender’s definition of “well qualified,” you could lock down a historically low rate on your loan. But you may have to pay points at closing to get the best mortgage rates available, and you’ll definitely need an excellent credit score.

If you use an FHA home loan, you’ll be required to pay at least 3.5% down. If you get a traditional loan (not backed by the FHA), you’ll probably have to make a down payment of 10% or more to qualify for the best rates.