- Posted by: steve
- Category: mortgage news, mortgage rates
What should you do if you see a mortgage rate that looks too good to be true? Read our recommendations on the matter.
Securing a low mortgage interest rate is one of the most important steps in financing an affordable house. Many people will contact a number of different lenders hunting for the best mortgage rate.
Once the lowest rate is promised, the buyer will often dive head first and move towards the application process.
However, this may be a mistake. In fact, the delta between the highest and lowest interest rates offered on a given day is usually no more than a quarter of one percent.
If a mortgage rate appears too good to be true, it may be artificially low and the deal not as good as advertised.
Read on for a guide to evaluating mortgage interest rates and learn tips on how to obtain the best financing terms.
Verbal Word is in the Air, Written Word is Always There
This old adage rings especially true when it comes to rate shopping. If a lender provides an interest rate over the phone or in a face-to-face meeting, it means very little.
Rather, an interest rate offer is not official until a temporary lock agreement is put into place or the loan itself is executed. Essentially, get the interest rate offer in writing and lock it into place as soon as possible.
This same principle applies for other mortgage-related fees and expenses. Ask the lender for a Good Faith Estimate for a written breakdown of all expenses that will be incurred during the financing process.
While it is important to remember that this is just an estimate and not legally binding, it will help keep the lender honest about fees and important for personal financial planning purposes.
Lastly, it is wise for buyers to be knowledgeable on the range of interest rates being offered. For example, in 2017, mortgage rates have ranged from 3.87 to 4.27.
This is invaluable information to know. If the interest rate is lower or higher than this range, it should raise a red flag to the buyer.
How to Lock in a Mortgage Rate
As alluded to before, an interest rate offer means little without a formal agreement. A lock agreement will do just that.
This agreement fixes the interest rate for a set duration, regardless of what fluctuations take place in the market for bonds and loans.
In general, lock agreements are offered for a time period ranging from 15 to 45 days. Even a lock agreement, however, does not guarantee the rate.
If the set duration expires, the buyer will have the choice to pay fees to extend the lock agreement or let it expire and face the realities of the market.
To be clear, there are risks in both the positive and negative as it pertains to financing cost. If interest rates tank after entering into a lock agreement, the buyer will not be able to capitalize off of a more favorable market.
Nonetheless, many buyers feel more comfortable locking in a rate and fixing the mortgage payment.
Beware the Old Bait and Switch
The mortgage industry is heavily regulated by both state and federal governments. While this provides a certain degree of consumer protection, it does not completely eliminate the risk of getting scammed.
One common tactic is for untrustworthy lenders to draw a buyer in with a low mortgage rate and minimal fees. In the 11th hour, the lender increases fees and the interest rate.
The buyer is now put in a very precarious position because time constraints may not allow finding a new lender. Remember, the mortgage application process can take upwards of 30 days.
For this reason, many buyers have to begrudgingly accept the new and unfavorable terms. The best way to avoid this type of situation is by employing trusted mortgage brokers and banks with sterling reputations and decades of experience.
Use APR to Compare Lenders Rather Than Mortgage Rates
Interest rates can be misleading. Some lenders may offer an artificially lower rate to bait unsuspecting buyers in, all while making the cost difference up with fees, mortgage insurance, and more.
The APR, or annual percentage rate, is a better gauge of the true financing costs of the mortgage.
APR includes a wide variety of fees and other expenses. These fees include but are not limited to; the base interest rate, origination and underwriting fees, mortgage insurance premiums, and points.
Points are essentially a down payment on the financing charges over the life of a mortgage. By paying points, the buyer will obtain a lower interest rate.
As clearly demonstrated by deconstructing the APR, it is a much better metric to utilize for comparison purposes and rate shopping. The interest rate simply does not paint the entire picture.
There are a Number of Mortgage Myths to Beware of
When it comes to mortgage shopping, knowledge is power. Buyers will be empowered to make the best decisions by understanding common misconceptions.
For instance, many believe that rates guidance is issued daily. However, this is not true. Just like stocks and bonds, mortgage interest rates change over the course of a day, sometimes even dramatically.
This is important knowledge. If a buyer contacts one lender in the morning and one in the afternoon, the rate difference may be explained by normal market fluctuations.
Another myth is that the bank where you hold a checking or savings account offers the best financing terms. There certainly may be a discount, but it does not relieve the duty of a savvy buyer to shop around for the best deal.
The inclusion of spouses also causes confusion when it comes to mortgage rates. Many falsely assume that adding a spouse can only help lower the interest rate, however, this is very different from a cosigner.
In fact, the lower credit score in the couple will actually be used to determine the interest rate.
The Lowest Rate May Truly be too Good to be True
As learned here, a low rate offer may not be indicative of the true financing costs of the mortgage. Rather, savvy buyers should compare rates using APR.
When the best deal is discovered, enter into a lock agreement to secure it. If there are any questions about rate shopping and mortgages in general, please do not hesitate to contact us for additional information.