| You're shopping
for a mortgage and you contact a lender advertising competitive
interest rates. You're told that while the lowest rate is no longer
available, you might qualify for a loan at a bit higher interest rate
that has a prepayment penalty built in. You decline; but are amazed
when the lender calls back in two hours to offer you a competitive
interest-rate loan without a prepayment penalty.
What's going on? Is it an illegal form of
bait-and-switch or is the lender just being competitive?
While the practice might initially send up red
flags to the consumer, the lender was (hopefully) acting in a legal
manner. True bait-and-switch is luring a buyer to a certain product
without ever having that product or service available, then placing
the consumer in a product that's more expensive and/or beneficial to
the company. The lender in our example had more of a "let's - see
- how - badly - we - want - this - loan - before -
becoming - really competitive" attitude. And with rates
up-ticking more actively now than in the past five years, responses
like this are bound to occur more frequently.
Here's why being a savvy consumer makes all the
difference.
Since you know the lender is doing his/her best
to maximize profit, you need to become vigilant to minimize YOUR costs
--- not just where rates are concerned but in the overall cost of
borrowing. This includes discount points, loan fees, private mortgage
insurance costs---even the ability to pay your property taxes and
insurance separate from your monthly loan payment. (Yes, even though
this privilege is typically available when making a 20% or greater
down payment on a mortgage, you usually need to ask for it. But why
shouldn't you have the benefit and float of your own cash instead of
parting with it prematurely to the lender each month?)
A prepayment penalty would also fall in the
category of unnecessary costs, especially if you were to refinance in
a short period of time.
Another confusing interest rate incident is when
a lender gives you a range of rates and discount points. For example,
if you're merely discussing mortgage possibilities with a lender over
the phone, a specific rate might not be quoted. Why? The lender needs
more information before quoting an exact rate. He/she would check your
merged credit report (also called a "mortgage credit
report") check your credit score, and run your qualifying ratios
(based on the income and debt information you give.)
The bottom line is that lower rates and lesser
points generally go to financially stronger buyers. In fact, it's not
uncommon for a conscience lender to quote you the highest probable
rate and points for the loan you're considering, even up to the time
of the Good Faith Estimate. The idea is that although this is merely
an estimate of costs, it will probably lean to the grimmest side of
what you could end up paying.
There are few purchases in life as important and
expensive as a mortgage. Why tip the scales needlessly in favor of the
lender?
Written by Shirley J. Hagler
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