Found a great mortgage rate? Beware — expert says a low rate ‘blinds’ buyers to a catch that could cost them thousands

Mortgage rates have recently surged to levels not seen since last August, leaving many house hunters blindsided by seemingly attractive deals that could ultimately cost them thousands of dollars in the long run. Financial experts warn that discount points, which lower monthly payments and overall interest rates, may appear beneficial but can have hidden costs.

Discount points are an upfront payment made to lower the interest rate on a mortgage loan. Each point represents a percentage of the loan amount. For example, if a $400,000 mortgage loan has a two-point discount offer, the buyer would pay $8,000 upfront to secure a lower interest rate. While these points are common and often offered at or below one, lenders like Chase and Rocket Mortgage are currently offering two points on some lower-than-average mortgage rates.

However, experts caution that buying discount points may not be the best decision for everyone. Senior Vice-President and Chief Economist at the Mortgage Bankers Association (MBA), Mike Fratantoni, warns that if a borrower only holds the loan for a short period, the effective cost of the points will be higher than the Annual Percentage Rate (APR).

Financial planner John Cooper from Greenwood Capital states that if life circumstances change, such as a job transfer, growing family, or the opportunity to refinance to a lower rate, the thousands of dollars spent on upfront points cannot be recovered.

Furthermore, experts suggest that if interest rates stay between 6% and 7% for the foreseeable future, lenders are strategically shifting the cost onto buyers, locking them into longer-term loans and increasing their profits. John Cooper, a certified financial planner, explains that to break even on a mortgage with points, the buyer would need to hold the loan for 80 months. In a long-term home purchase, this might be feasible, but refinancing in three years could make it unprofitable.