Imagine getting a $55,077 mortgage credit rather than paying a mortgage fee to get a new loan. A $55,077 mortgage credit was what I was quoted for a $4.125 million, 10/6 ARM at a 3.625% rate. Surely receiving a large credit is better than paying a mortgage fee right? Not necessarily.
The higher the mortgage rate you are willing to pay, the greater the mortgage credit you receive. The reason is that the lender is making a higher interest rate spread off your loan.
Taking out a new mortgage at a lower 3.375% rate with only a $3,514 credit might be a more optimal decision for a well-qualified borrower. By saving $576 a month in mortgage payments, you will break even in 89 months.
You get 89 months by taking the difference in the credit of $51,563 and dividing it by $576. If you plan to hold the mortgage for longer than seven-and-a-half years, then you will come out ahead all things being equal. If you invest the difference with positive gains, you will break even sooner.
This is the traditional argument for why getting a lower mortgage rate with less credits may be better. However, there is another argument for why paying a small mortgage fee is better than getting a large credit. And I’m not sure most people know this. I didn’t until recently.