Q: I’m buying a house right now, and I have a mortgage broker I really like. But I keep seeing advertisements that say the going interest rate is 5 percent. My mortgage broker keeps quoting me 5.5 percent, though. I do trust her, as she has worked for my parents and siblings for many years, but is that legitimate?
A: Go back to those mortgage adverts that piqued your interest. Scroll down — see all that fine print? Dollars to doughnuts says that’s where you’ll find the reason that teaser rate is so low, when your family’s trusty mortgage pro says the rate you qualify for is actually a half-point higher.
Mindset Management
I sometimes think the Declaration of Independence should be revised to guarantee every American the rights to life, liberty and the pursuit of the lowest mortgage interest rate — that’s just how rate-obsessed most smart homebuyers are. However, a mortgage’s interest rate should never be looked at in isolation. It is inextricably intertwined with a number of other elements of that loan, and changes when you change those other elements. For instance, if you pay more points, your rate goes down. The longer your mortgage rate and payment are fixed, the higher the rate, and so forth. So, unless and until you have all the information about your proposed mortgage and the mortgage being advertised, you are simply not comparing apples to apples.
One more thing — if you have a mortgage broker that has proven herself to be trustworthy, be very, very nice to her. But, don’t be afraid that you will offend her if you ask her to explain why your rate is not as low as what you are seeing advertised — she probably wants to be your mortgage information resource. She’ll probably very quickly be able to look at the teaser rate and the accompanying fine print, and tell you exactly why the rate she quoted you was so different.
Need-to-Knows
Some of the more common reasons that you may not be quoted a rate as low as the teaser interest rate you see in an ad include:
- Different loan type/amount. Conventional loans operate on a different interest-rate schedule than FHA-insured loans. Fixed-rate mortgages have higher rates than adjustable-rate mortgages. Jumbo mortgages have higher rates than those within the conforming loan limits.
- Different loan term. The interest rate on a 15-year loan will be different than that on a 30-year loan, which will be different from the rate on a 40-year mortgage.
- Different down-payment amount. If you’re putting 3.5 percent down, you’ll pay a higher interest rate than someone putting 20 percent down.
- Different credit score. Just like credit cards, mortgages operate on a risk-based pricing matrix — if your credit score is 650, you’ll pay higher interest than someone with a FICO score of 800.
- Discount points. You can actually pay tax-deductible discount points up front and bring your interest rate down. Often, advertised mortgage rates will assume the borrower paid two discount points, while most real-life borrowers are paying only a one-point origination fee. …CONTINUED
Action Plan
1. Have a conversation with your mortgage broker. Tell her what you told me, and ask her why the interest rate is different than what you’re seeing out on the streets.
2. Given what you know now about discount points, rethink your approach — instead of asking your mortgage broker what rate you qualify for, ask her, "What would it take to get a rate of 5 percent?" Then, you can do the math and see if the expense of the additional discount point(s) makes sense in light of what you stand to save in your monthly payments over the time you plan to have that mortgage.
3. For people who have a great mortgage broker on their side, I’m not a big proponent of shopping a bunch of other brokers, because it opens you up to being taken advantage of and ending up with a loan that sounds better but is actually worse. However, if you get no satisfaction through Steps 1 and 2, get a referral to another mortgage professional and get a good-faith estimate that specifies their best rate and terms for the same type of mortgage. Take this back to your trusted mortgage pro and have her help you pick it apart and compare loans line item by line item. That way you’ll be able to rest assured that you’re getting the best loan you qualify for, and you won’t be going behind anyone’s back to do it!
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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