Truth about rate quotes

When you’re looking to buy a home or refinance your current mortgage, it’s easy to feel overwhelmed. Ads are literally everywhere but how do you cut to the chase and find the very best offer?
One of the most important things you can do when shopping for a home loan is to sit down and look at the real numbers.  The lowest interest rate quote doesn’t always get you the best deal.  Let’s cut through the BS and get to the bottom of what you should look for when you get a mortgage and how you can avoid being misled and paying hidden fees.

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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. Comparing the total cost of loans is one of the smartest thing you can do. You’ll increase your chances of getting the best loan terms for your situation and find a loan that helps you buy a house affordably.  Evaluating the overall price of a home loan requires you to look at several components such as fees, discount points, the length of the loan—and of course, interest rates.

Lender ads

What you see lenders typically advertise is a one size fits all rate with some tiny disclaimer words you can hardly read or they say so fast you can't make it out.  Doesn't sound like full disclosure to me!

The truth is-- that rate is unlikely to apply to you.  Here is a list of just a few items 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 a few of the main factors that influence 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. The more money you put down, the more stake you have in the property.

  • Loan term: Shorter terms (like a 15-year or a 20-year) generally have smaller 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 (like conventional, fixed-rate, FHA, etc.) have different rates.

  • Credit score: Primarily based on credit report information usually sourced from credit bureaus. Typically, this is called your FICO score and is based on your credit history.

  • Property usage  Primary residence gets the best rate followed by a second/vacation home and then higher still is a rental property.

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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 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.

THE ONLY RATE QUOTE THAT MATTERS IS THE DAY YOU LOCK.

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

Be wary of a lender with significantly lower rates and closing costs than anyone else.  All lender rates are dervived 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. 

Smaller, well managed lenders are often much cheaper than these big lenders. mainly due to much lower overhead.

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You need a monthly payment Calculator

A very quick way-- on a low or zero down payment purchase-- to calculate the full monthly payment —usually within a hundred dollars or so --- is to take the sales price divided by $1000 and multiply that number by $7.  For example, a $300,000 sales price divided by $1000 equals 300.  300 times $7 equals $2100 a month for a total payment including – the loan principal and interest portion of the payment-- property taxes-- home insurance and any mortgage insurance.  A more accurate way is to use my smart calculator—click on the picture for access.  Keep in mind some areas--like foothill or mountain locations  have higher home insurance costs and this can throw off these numbers a bit.