INTEREST RATES
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.
Consider SERVICE
. . . it’s an
overused word but critical to any buyer. Will the lender . .
- help the buyer consider all the available options . . . Interview
and counsel!
- 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
sometimes cancels.
Be Smart!
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.
New Good Faith Estimate (GFE) Rules
In an effort to thwart abusive lending
practices, including misleading quoting of interest rates, a new form has been
established. The main reason for the new form was to eliminate lenders’ quoting
higher fees in exchange for extra income (called rebate pricing or yield spread
premium pricing) without the borrower’s knowledge. The new form was intended to
provide better disclosure to borrowers. Unfortunately, the form is quite
confusing and it remains unclear if it has met its intended purpose. See the
tip sheet section for Good Faith Estimate (GFE) Rules.
In an effort to provide as much information as possible regarding interest
rates, we refer you to the links below that will give you additional insights
into various aspects of interest rates and the loan process.
The effect of economic news on interest rates
Calculating your true rate Locking-in your rate
Never a better time to buy
Credit scores impact your rate
Understanding your credit report