Rate Shopping

by Brian Berman on February 25, 2010

http://www.allaboutnews.com/web/images/print/pic2_HBH.jpgShopping for the best interest rate possible has always been the consumer’s primary objective when borrowing money. As well it should be! However, the problem with this strategy is that there is so much misleading information on the subject produced by various media outlets.  While the internet, along with other media such as radio, television and billboard advertising, focus on rate, they sometimes forget to focus on other aspects of the loan process. 

The goal of this type of marketing is to make the lender’s phone ring, and that is a problem for the consumer.  Often, the advertiser offers an absurdly low interest rate, with the intent of using a "bait-and-switch" technique once the client is reeled in. This is almost always done through short pricing. Short pricing is when a lender offers an extremely attractive interest rate, but that rate is only locked-in for a very brief period of time which is never practical.

Most home buyers enter into purchase contract and set their closing dates 30-45 days out from the day the contract is signed.  Pricing on an interest rate locked in for a 7-day period is of no use to most prospective home buyers. It simply isn’t enough time to complete the transaction. While the billboard advertising or Internet banner ad may boast a terrific rate, the lock-in period is often not realistic in terms of providing enough time to negotiate a purchase contract and close the deal. Be very careful when shopping for interest rates. Make sure that when you are quoted a rate, you are asking the broker what the lock duration is. Make sure that lock period allows you enough time to complete your purchase transaction.

While the new GOOD FAITH ESTIMATE does a good job at showing all of the costs associated you’re your loan, another tool would be the APR.  However, many dishonest lenders have found ways to make the APR seem lower than it actually is!  All lenders are required by law to state the real cost of the financing through the Annual Percentage Rate (APR) each time an interest rate is quoted in advertising. APR takes many of the fees associated with the loan into consideration, and it is usually listed in fine print as a disclaimer.  Make sure before you move forward with a loan that you have seen the Truth in Lending disclosure.  (Make sure there is no prepayment penalty listed).  If your APR is more than 1% higher than your interest rate, ask your lender for a better explanation.  (This only applies to loans over $120,000)

Advertisers often list a low interest rate in large bold type, but the higher APR indicates in fine print that several points are being charged to get that rate.– This tactic is against the law!

While APR can be helpful in comparing rates seen in advertising, it is important for consumers to know that lenders use different methods to calculate APR. Hence it is not an entirely failsafe method for comparing interest rates.

Home Buyers must take into consideration that the interest rate is not the only important factor in obtaining financing. Another equally important question to answer is, "How long do you need to borrow this money?"

The length of time you need to borrow the money has a profound impact on whether or not you should be paying upfront fees (points), and likewise has bearing on your loan program selection.

On average, homeowners move every 7 to 10 years. A common mistakes made by home buyers is automatically selecting a 30-year fixed rate loan program for financing without evaluating other options. The chance of needing the financing for 30 years is actually slim-to-none. If the buyer is somewhat transient in their job or is planning a family in the near future, the home may not really meet their long-term needs. It is a good idea to speak with a loan officer to see if a fixed rate is a good program for you.

Buyers are often solicited with programs that are contingent upon 30-year financing. The interest rates that are offered, regardless of how low they might be, are often irrelevant as rates are dependent upon several factors, including down payment and credit score.
The following factors contribute to the rate you are quoted… if you do not give all of these items to your loan officer the rate quote may not be accurate:

  1. Credit Score
  2. Down Payment amount and where it came from ( 5% , 10%, 15% 20%+; own funds or a gift)
  3. Type of dwelling (Single family, Condo, Town Home)
  4. Job history
  5. Type of mortgage (Fixed or adjustable)
  6. Rate lock (how many days from closing)

As always, current market conditions dictate what the best loan programs will be at the time you want to buy a home. The most important thing is to ask your lender about available programs and look at all of your options.

It is of utmost importance to work with an experienced loan consultant that understands your goals. A well-versed consultant will ask you many questions about your short- and long-term goals, and assist you in choosing a loan program that is truly suited to those goals.


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Mortgage Atlanta, LLC. 601 Woodlawn Dr,, Suite 340. Marietta GA 30067. Phone: 678-564-1522 info@mortgage-atlanta.com

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