The Myth of The Freddie Mac Average Mortgage Rate

Each week Freddie Mac—one of the giant Government Sponsored Mortgage Enterprises—releases their “Primary Mortgage Market Survey” or “PMMS”.  For the week ending November 10, 2011 the average 30-year fixed rate conventional mortgage was reported at 3.990%.

Almost invariably the mainstream media will spin this report as “Mortgage Rates Hit All-Time Lows” or “30-Year Mortgage Rates Drop Below 4%!”

You may be surprised to hear that this sort of media coverage causes our phones to ring off the hook.  A typical conversation starts like this:

“I just heard that mortgage rates dropped below 4%.  Why can’t you get me a lower rate?”

This is a very fair question.  Not surprisingly the media neglects to share much of the information that is available on Freddie Mac’s very own website[i].  The reality is that only a small percentage of borrowers are eligible for the rate that is disclosed in Freddie Mac’s PMMS survey.

First off the survey only solicits information from lenders on a very specific loan profile, as follows:

·         A first mortgage “conventional” (lowest available rate) loan

·         On a primary residence

·         With 20% equity (80% “loan-to-value”) in the subject property

·         With an average amount of “points” (one point = a fee of 1% of the loan amount) paid

In addition there are countless other factors that will affect the interest rate that is available to a consumer such as:

·         Their credit score.  At that same 80% loan-to-value a borrower with a 660 credit score would pay 2.5% more in points than a borrower with a 740 score.  That equates to an additional $7,500 in fees on a $300,000 loan.

·         The presence of a second mortgage.  Depending on the amount of the loan the cost here could range from nothing to as much as 1.5% in points just because you have a home equity loan or line of credit on your home.

·         Whether you are just refinancing an existing loan or pulling cash out for any other purpose.  Here again a “cash out” refinance can add nothing, or as much as three additional points, to your loan cost.

·         The property type.  Do you own a condo?  If so it will cost you 0.75% in points more to refinance at 80% loan-to-value than a borrower with a single family detached dwelling.

And the list goes on.  Generally lenders build a good portion of these additional points into the rate that they quote a consumer (because it rarely makes sense for the consumer to have closing costs ramp up into the tens of thousands of dollars).  So let’s use the above and do a hypothetical example:

Bob Homeowner hears the news about the Freddie Mac average mortgage rate dropping below 4% and is excited to refinance his $300,000 mortgage.  Bob figures he owes about 80% of the value of his condo.  He has a second mortgage that puts the total debt on the property to 97% or so.  While he has paid every single mortgage payment on time the tough economy has caused him to miss a few credit card payments here and there so his credit score is sitting around 670.

Bob contacts his existing lender to get his refinance started.  He is shocked to hear that, instead of 3.99% with 0.70% in points—$2,100 in loan fees plus closing costs (the average in the 11/10/11 Freddie Mac PMMS)—he is offered:

·         3.990% with 5.45% in points ($16,350 in loan fees plus closing costs), or he can build some of those costs into his rate and get,

·         5.250% with 1.25% in points ($3,750 in loan fees plus closing costs)

The moral of the story—as is so often true with the media—is don’t take what you hear at face value.  Their agenda is getting ratings not conveying accurate information about your home loan.

The Freddie Mac PMMS is a very useful tool to follow trends in the mortgage market.  If the average rate is down from last week it is almost certain that the available rate for your personal refinance is also down.  But don’t assume that means you are necessarily eligible for the interest rate quoted in the survey.  Contact a trusted local mortgage advisor who can educate and inform you about your personal circumstances and whether or not it makes sense for you to refinance at today’s historically low interest rates.