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The truth about online rate quotes

When shopping for a home loan, it’s easy to feel overwhelmed. Ads are literally everywhere --so how do you cut to the chase and find the best rate for you?

One of the most important things you can do is look at the real numbers.  The real numbers are the rate plus lender fees for that rate. Lender fees can be points, origination fees or just plain old garbage fees big lenders are fond of charging.

In short--the lowest interest rate quote doesn’t always get you the best deal.  Often, that lower rate has a ton of lender fees--points and other garbage fees.

Don’t be fooled by big lender & online ads

We all know it’s easy to be fooled by low “teaser” rates that are advertised on TV and online. What you see lenders typically advertise is a one size fits all rate with some tiny disclaimer words you can hardly read or with TV and radio ads, they say it so fast you can't make it out.  Doesn't sound like full disclosure to me!

The truth is-- that rate is the best they have for a perfect borrower and property scenario-- and even if truthful its unlikely to apply to you.  With that in mind, below is a list of unique factors that will affect the interest rate you would receive. As you can see - it would be impossible for a rate quote ad to factor in these variables to provide you with accurate info until a loan officer asks you some questions.

Here are the factors that affect the rate you receive.

  • Home price and loan amount: Your home price minus your down payment will determine how much you’ll borrow which helps determine how much the interest rate will be.

  • Down payment: Generally, a higher percentage down payment equals a lower interest rate.

  • On a refinance: the rate is affected by the loan to value (LTV). LTV is calculated by comparing the loan amount to the appraised value. Higher LTVs will have higher rates on conventional loans.

  • Loan term: Shorter terms (like a 15-year or a 20-year) typically have lower interest rates than a 30-year term.

  • Interest rate type: Interest rates come in two basic types: fixed and adjustable. Fixed rates do not change over time. Adjustable rates, on the other hand, have an initial fixed period then go up or down based on the market. For example, a 5-year ARM loan will have a fixed-rate for the first 5 years and then the rate will fluctuate from the 6th year onward.

  • Loan type: Different categories of loans (Conventional, VA, FHA and USDA) have different rates.

  • Credit score: Based on credit report information sourced from the 3 major credit bureaus, Transunion, Equifax and Experian. Each bureau has a different formula that results in a credit score -- commonly called a Fico score --based on your credit history and credit usage as well as available credit. Lenders use the lowest middle score of all borrowers.

  • Property type & usage  Primary residence gets the best rate followed by a second/vacation home and then higher still is a rental property.  Condos and manufactured homes typically have higher rates

Another common problem with getting a rate quote

You often get one from Lender A on Monday, Lender B on Tuesday, and Lender C on Wednesday. Rates can change daily, sometimes multiple times. Therefore unless you get all your quotes at the same period of time, you don't have accurate information

and may end up going with the wrong company.

Many lenders purposely quote rates lower via their web sites to simply get you to stop shopping around. This is especially true for purchase loans, as you most likely will NOT be in position to actually lock that rate today.


DID YOU KNOW? You can usually pick any interest rate or total lender fee you want. Just understand selecting one always affects the other. Want lower lender fees? Your interest rate goes up. Want lower interest rate? Your lender fees go up!

Be wary of a lender with significantly lower rates and closing costs than anyone else.  All lender rates are derived from the same mortgage backed securities market

(MBS) - with larger lenders typically needing a higher profit margin-- they charge more to cover their increased overhead.  The bigger the lender, the bigger their overhead. They have to charge more to pay for those high priced TV ads and stadium naming rights.

Smaller, well managed lenders --like a mortgage broker are often much cheaper than big lenders. mainly due to much lower overhead.

What you pay is the wholesale cost of money plus the lender markup--and all lenders--big and small-- have pretty much the same cost of wholesale funds.

So it's their markup, or gross profit that decides how much that lender charges on a given day. the markup is a combination of points, origination fees and other garbage fees like underwriting, admin, funding fee, and super high loan processing fees.

And another way a lender increases their profit is by charging a much higher than market rate while reflecting super low lender fees. However the rate is way way higher then it should be. Higher rates means more money flows to the lender upon delivery of the loan.

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