Fast forward to the beginning of March. Our 3.75% mortgage no longer looked as good as it once did. On March 2, we looked at mortgage rates after seeing the impact COVID-19 had on the markets. We were shocked to see that interest rates on a 30-year fixed-rate mortgage had sunk to all-time lows.
Even though we'd closed on our home and original mortgage less than two weeks prior, we decided to refinance .
Unfortunately, we weren't able to lock in the rock-bottom rates we saw on March 2. Our credit reports hadn't yet updated to include our new address. The lender couldn't pull all of our credit reports to lock our rate.
The Federal Reserve cut rates but mortgage rates went up
On March 3, the Federal Reserve cut the federal funds rate by 0.5% at an emergency meeting. Some people assume that means mortgage rates will drop 0.5%, too. That's not how it works, though.
However, once my wife and I finally fixed our credit reports, we shopped around to find a decent rate. On March 4, we locked in a 3.125% rate with a credit to cover some of our closing costs.
I asked our mortgage lender why rates increased. He told us demand for refinances had gotten so high that the mortgage companies couldn't handle it. Instead of turning people away, some lenders raised rates. This discouraged people from applying. If people still moved forward, mortgage companies would be able to make more money from the higher rates. This made processing the additional loan worth it.
At one point, we saw rates as high as 5.125% at one of the lenders we previously considered. This is the same lender that offered us a 3.00% rate two weeks earlier before our credit report issue came to light.
The Federal Reserve came to the rescue, which resulted in a better deal
Even though we locked our rate, our loan officer told us if we could find a better rate before closing, he would match it. The day before our closing, on March 23, the Federal Reserve announced it would "continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning."
This was great news for mortgage rates. For competitive lenders, it temporarily dropped rates even lower than we saw on March 2. We were able to find a bank offering a 2.99% 30-year fixed-rate mortgage with a half a point credit to help pay for our closing costs. We showed our loan officer the loan estimate from their competitor and they matched it by the end of the day.
Rather than taking the lower rate, our loan officer allowed us to get an even larger credit and keep our 3.125% interest rate. In total, we received a $3,643.80 credit to cover our $994.11 in closing costs. When we netted out the costs, our lender paid us $2,649.69 to refinance our less than one-month old mortgage.
To make things even sweeter, our mortgage rate is now 0.625% lower. Our payment is smaller, and we'll save $42,519.60 in interest over the life of the loan assuming we pay it off as is. We didn't even have to make our first payment on our original mortgage.
