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Advertised Interest Rates and You

We know, we hear it all the time: I saw an advertisement for interest rates at 4% for my loan so why are you telling me 4.5% for the same loan? Simple, it’s not the “same loan”. Unfortunately just because one advertiser says they can offer a fixed 30 loan at 4% and the other says they are offering the “same loan” for 4.5% you have to ask yourself why and be curious about the answers.

I recently ran into a discussion on the forums over at Trulia where a reader had asked an open forum question about USDA loan. The USDA Rural Development loan is a government insured loan loosely based on FHA which allows the borrower to borrow up to 102% of the sales price which means no down payment and even part of the closing costs can be paid in the loan.

The question was “What are some of the mortgage rates for a USDA loan?” The first respondent answered about 5% with 1% origination which, when I checked rates at Suntrust bank, was pretty accurate. Amazingly, however, one loan officer with a very large bank in America reported 4.875% with basically no lender costs (in other words, no origination, no discount). So why did I respond and advise the borrower to be leery? It’s not even in my area of operations so I’m not trying to “steal” the client with my information. Why did other respondents also challenge this loan officer’s answer?

Because we all know there is a catch somewhere. Everybody gets paid and nobody works for free so you can bet even this big bank (which is facing some very difficult economic challenges) is not going to work for free, either. This is a symptom of a much grander scale of rate quoting issues. We hear it all the time – in fact we just “lost” an applicant to a major “quick” competitor who priced a full .25% lower than we offer and assured the borrower there is no discount fee. They are right, there is no discount fee but there is a .5% fee we don’t charge and a $400 up front application fee we don’t charge. In the end we offered her a better deal than they did but she fell for their tactics. She still got a good loan but just not truthfully.

Here is a very important tip that almost every reader does not know: Interest rates and APR are very easily manipulated and can be used to mislead home owners and buyers. There are ways to protect yourself a little better against almost everything except that “at the closing table” surprise.

Five numbers to compare regardless of what any rates say:

1. Your loan amount. Fees can easily be hidden in the loan amount to trick you. Of course you can also choose to pay fees in the loan amount to keep from having to bring closing costs. This generally only applies to refinances but can also be used on purchase loans.
2. The number of payments. Are both loans for the same term such as 30 years? A shorter loan will have a higher payment and a longer loan a lower payment even if they are the same interest rates and other costs. There are 40 year loans still available which would make the payment lower but the amount repaid higher.
3. The total amount you are bringing to closing. If you are bringing more to closing on one loan than you are on the other then you are paying for something, somewhere. This is not necessarily a bad thing but you do need to pay attention to it.
4. Your monthly payment amount including principal, interest and monthly mortgage insurance premium if there is any.? One loan may have a lower rate but higher payment because of MMIP. While the MMIP does eventually go away it could affect your payment for 5 years or more. Again, by itself not a bad thing but coupled with others can be a “gotchya!”
5. Prepaid fees on the good faith estimate to make sure they are all there and reasonably similar. Tax reserves, interest reserves and prepaid interest days should all be comparable. While these do go into the closing costs they can easily be manipulated – especially the prepaid interest days.

If you pay attention to the details and not the trash talk banks do to brokers and brokers do to lenders and lenders to to banks you can reasonably be sure to get a good loan. If you are not in my service area (Georgia and Florida) I will be more than happy to review any Good Faith Estimate for you and give a third party opinion for a small fee. Feel free to contact me directly at 678-946-0101 with questions.