SHOPPING RATES . . . A FEW COMMENTS!
Often the first question asked by a potential borrower is "what is
today's interest rate?" Interest rates change regularly and sometimes very
rapidly. The actual rate you may expect depends on the "type" of loan
you ultimately acquire. With the introduction of risk based pricing (see tip
sheet section) rates are adjusted based on a borrower's credit scores, the
loan-to-value ratio and other loan aspects that impact the interest rate
obtainable. In other words. loan “pricing” is complicated and confusing.
Buyers are advised to shop rates and
negotiate the fees. The media “suggests” that mortgage representatives
will likely inflate both the rate and fees when given an opportunity. The
problem for most buyers is “how would they know if someone is taking advantage
of them?” The reality is that the buyer must ultimately determine if the person
from whom they intend to acquire financing is trustworthy.
SHOPPING RATES AND
POINTS . . . these are
the two loan aspects that are perhaps most easily understood by prospective
borrowers? But, there are numerous other considerations when acquiring
home loan financing. Lenders make loans based upon their risk level and
the “yield” on the mortgage over a period of time. Points (one point equals 1%
of the loan amount) are the cost for acquiring a loan and are a part of
the lender’s yield calculation. For instance, one might acquire a loan at
5% with a one point loan cost or 4.875% with a 1.5 point fee. The lender’s
yield will be the same over a pre-determined period of time. Because this can
be confusing, mortgage representatives could quote lower points as a “come on”
and compensate for the yield with a higher rate and/or fees.
The fact is that all lenders have
the same loan programs at the same costs. The difference is whether the lender
is charging an “overage” in the fees, a higher origination fee, etc.
Pricing depends on how long it might take to close the loan transaction.
If you are calling for loan quotes be sure that you
are comparing apples with apples. For instance, if one lender is quoting
a 15 day rate (remember, it is highly unlikely that you will close a
transaction from start to finish in 15 days) and the next lender is quoting a
more realistic 30 or 45 day rate, the more honest loan representative will be
at a disadvantage. So, think about the fact that you are not only
shopping rates but need also to concentrate on shopping service, knowledge,
expertise and the capacity to get the loan completed with the least hassle for
you, the borrower.
If you still
wish to only shop rates, don’t try to reach every lender . . . at most, select
only a few lenders. A good rule of thumb is when you have called several
lenders and received very comparable quotes, be very skeptical of the one
“fantastically” low quote from some lender. Remember the saying “ if it is too good to be true, etc.” While you may feel
that the higher rate quote is not competitive, it might just be the more
honest approach to letting you know what to realistically expect.
Potential buyers have become more suspicious of what they
sometimes view as "bait and switch" quotes. Local lenders try hard to
quote as accurately as possible, based upon your individual loan needs and your
current credit situation and the risk based factors that have to be considered.
The more legitimate lenders will most likely tell you that they are unable to
quote reliably without having your documentation information, including income
information, bank statements, credit report, etc. Only then can a dependable
rate quote be provided.
DON’T RELY UPON THE INTERNET . . .The
internet is notorious for misinformation. There is little accountability
by internet lenders so they can quote super rates. Unfortunately, stories
are numerous about those borrowers who, upon receiving their loan documents,
find the rate different than that originally quoted. The response is
typically, “we exceeded the lock in period so the rate had to adjust
upward”. Usually, by then, the borrower is unhappy but the transaction is
too far along to cancel and start over.
. . . it’s an
overused word but critical to any buyer. Will the lender .
. - help the buyer consider all the available options . . . Interview
- get the loan completed in a timely fashion
- keep the buyer informed throughout the process
Buyers who shop
too much . . .
- can “shop until they drop” with confusion . . . result is often “to do nothing”
- can be dazzled by the fast footwork of some lenders . . . promising rates
and terms that are impossible . . . The result is the loan takes longer or
Trust your intuition. You can see that acquiring an interest
rate quote is not as simple as it appears. When you find a mortgage lender who you trust, stay with them. Stop
shopping rates and enjoy the loan experience.