As mortgage rates continue to fall, lenders are rolling out splashy discounts and promotions to inspire reluctant home buyers. But critics say the newest offers still stop short of the best deal for borrowers: Lower rates.
From large banks to credit unions, a growing number of lenders are waiving fees, lowering rates and finding new ways to cut loan prices for would-be home buyers and refinancers. Capital One is waiving some closing fees for refinancers, which can save $3,300 on average. Citi and Bank of America are discounting fees by as much as 0.75 percentage point. And online lender Quicken Loans is telling customers who get a mortgage through December that if mortgage rates fall in the future, they'll be able to get the lower rates with most refinancing costs covered.
While some of the deals are available to refinancers, they are mostly aimed at home buyers. In this market, new purchase mortgages can be more profitable for banks. But they currently account for just about 20% of all mortgage applications, according to the Mortgage Bankers Association. "We are still amazed that record low interest rates and significantly lower home prices have not resulted in strong loan demand," says Tim Zimmerman, president and CEO at Standard Bank in Pittsburgh, which is lowering closing costs by up to $500 for home purchases and refinances.
That's a small discount, relatively. Closing costs typically run up to 2% of the loan amount -- $500 would fully cover closing costs for a $25,000 loan. Zimmerman says that on refinances closing costs tend to be lower, and that this discount along with low mortgage rates creates an opportunity for borrowers.
But other offers are more generous. In a rare deal for refinancers, Capital One is eliminating on average $3,300 closing costs -- including the appraisal and title-related charges -- for homeowners who refinance into a 30-year mortgage in some locations, including New York, Texas and the Washington D.C. metro area. Some credit unions are also slashing closing fee costs. In August, for example, the largest credit union, the Navy Federal Credit Union (designated for Department of Defense employees and their families) began offering $2,500 off of closing costs for borrowers.
Other lenders are discounting costs that borrowers may pay when they sign up for a mortgage. Borrowers have the option to pay what are called "discount points" -- a prepayment of interest -- in exchange for a lower interest rate. One point equals 1% of the loan amount. Citi is offering home buyers 0.75% of the loan amount that can be used to offset discount points. On a $375,000 mortgage, the credit would be $2,812.50 -- plus the lower interest rate over the life of the loan. Earlier this year, Bank of America began offering 0.25 percentage point off discount points in 12 states; next month, the bank will extend the offer in nine more states, including South Carolina, Texas and Washington D.C.
But if you're seeing incentives, says Keith Gumbinger, vice president at mortgage-data firm HSH Associates, there might be a catch. To qualify for the Bank of America discount, for example, consumers must have at least $50,000 socked away with the bank or its investment firm.
Other incentives may be designed to distract from a rate that's not as low as it could be. The average rate consumers get on a 30-year fixed-rate mortgage is 4.25% -- about 0.75 percentage point higher than the lowest advertised, according to LendingTree.com. That's almost the widest spread since the firm began tracking the data in February 2010. On a $275,000 30-year fixed rate mortgage, the difference adds up to about $120 more per month, or more than $42,000 over the life of the loan.
For their part, banks say they're looking to attract new customers, or drum up more business with old ones, and that rock-bottom rates, though difficult to get, are accessible for borrowers with the highest credit scores, large down payments and low debt levels. But they also acknowledge that these promotions are good without being too good: A Bank of America spokesman says the institution is looking to price competitively but not low enough to spark an overflow of applications that would prevent it from being able to process the mortgages in a timely manner, the spokesman says.
Still, a low interest rate is still the key to finding the cheapest mortgage. Experts direct borrowers to consider lenders who are most eager for business, including online outfits, which can offer a lower rate because they have lower overhead, and smaller institutions like community banks and credit unions that might have more wiggle room on rates. With rates expected to stay low for a while, qualified borrowers can afford to haggle to get a low rate, which will help them save more than most incentives on the table now.