Understanding Rates & "Rate Shopping"

Shopping for the best interest rate possible is often a potential home buyer's primary objective when borrowing money. The challenge with this strategy is that there is too much misleading information released on the subject by various media such as Internet websites, email marketing, radio, television, and billboard advertising. Unfortunately, most of the rates displayed in advertising are too good to be true. Read on to learn how to avoid deceptive mortgage rate advertisements.

Do a Google search for "best mortgage rates"
and you will be astonished at the ridiculously low interest rates being offered by mortgage lenders. Most advertisements you will see are likely at least HALF of what you've been quoted by your bank and/or preferred mortgage lender. Huh? What gives?

The harsh reality is a mortgage company or loan officer CANNOT quote you a rate specific to you without first conducting a full interview to discuss your specific financial situation. So that extremely low rate you saw will likely not be the rate you are quoted. As a matter of fact, unless you have perfect credit and cash for a 20% down payment or more, can close in a week, and can walk on water, that super low rate you saw is as likely as you finally conquering that New Year's resolution you've had for the past few years. The more likely situation is the advertiser is employing one of the following deceptive advertising techniques:

Short Pricing
Often, the advertiser offers a ridiculously low interest rate, with the intent of using a "bait-and-switch" technique once the client is reeled in. This is often done through short pricing. Short pricing is a term that is used when a lender offers an extremely attractive interest rate, but that rate is only locked-in for a very brief period of time.The average consumer enters into a purchase contract to buy a home for at least 30 days. 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.

Another common marketing ploy that makes interest rates appear attractive involves the manner in which fees are presented. All lenders are required by law to state the real cost of financing through the Annual Percentage Rate (APR) each time an interest rate is quoted in advertising. Unfortunately, even though ads disclose the real cost of financing by listing the APR, they often don't do a good job of explaining the difference between the APR and the interest rate. The reality is, the APR takes many of the fees associated with the loan into consideration, and it is usually listed in fine print as a disclaimer. So while the APR can be helpful in comparing rates seen in advertising, it's important to understand that lenders use different methods to calculate the APR. Hence, it is not always the best method for comparing interest rates. Additionally, the consumer 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?"

Round Circle In A Square Timeline
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. For example, if you know you will only be in the home for five years, it wouldn't make sense to opt for a 30-year loan program or pay points up front to secure a lower interest rate. You would not be in the home long enough to benefit from such action. Sometimes the low rates you see are contigent on these upfront fees and are hidden in the APR.

Statistically, homeowners move every 7 to 10 years. One of the common mistakes made by home buyers is automatically selecting a 30-year fixed rate loan program for financing instead of 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 of utmost importance to work with an experienced loan consultant who understands the practical aspects of long term financial planning. A well-versed consultant will ask you many questions about your short- and long-term goals, narrow down a selection of programs based on the information that you have provided, and present you with an easy-to-read spreadsheet that clearly defines viable options for your interest rate and amortization schedule, monthly payment and any potential savings, and assist you in choosing a mortgage that fits your goals.

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