The refinance boom is back on and as always there is one issue which confronts all of us in the industry. When potential clients call and I have to inform them that the 4.5 percent they are hearing or reading about is really 5.25 percent, they’re flabbergasted and think I’m either attempting to gouge them or that our rates are somehow not competitive.
This is hardly the case so I thought I could provide tips on how you can find the true interest rate for your refinance or purchase.
Most of the information you hear and read from the media about mortgage rates is what’s known as a base rate. In some instances, this base rate has a point added to it to reduce the rate further and is rarely disclosed. So a 4.5 percent rate is designed for the perfect deal. Anything outside the box and it is no longer accurate.
Think of this base rate as the price you see advertised for a meal in a great restaurant. We’ve all experienced the surprise when we review the menu, we realize that the appetizer is extra, the salad is extra, the side dishes are extra and certainly the desserts are extra. Before you know it, the $11.99 special is $30 and rising.
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The same thing happens with mortgage rates. You begin with the base rate of 4.5 percent. After submitting an application you tell the lender that you only have 5-10-15 percent equity. Cha-ching! You tell him it’s a condo in Florida, Cha-ching! The lender reviews your credit and the score is below 700-720-750, Cha-ching, Cha-ching! And for every variable that the lending industry uses related to underwriting and associated risks, the rate keeps rising.
Interest rates have what’s known as add-ons just as “a la carte dinners” do. When a lender adds onto the cost of the loan, it pushes the rate up. The biggest add on is when the loan is under $100,000. Most lenders charge 1 percent for any loan under this amount. It goes up again if under $50,000. This will increase an interest rate dramatically.
With all this said, one must ask, “then how do I find the true rate?” There are two ways that work best. The first is to apply and receive the offer from your bank. Most lenders allow you to apply online and once you do, they are able to run it through their pricing systems. The system will take into consideration all those variables I spoke of earlier and spit out the true rate. This is now your rate upon which your payment will be made. However, you need to also ask for a copy of the good faith estimate to be sure there are no hidden fees which have helped reduce the rate. This is why one of the best ways to view your rate is to ask your lender for a copy of the “truth in lending” form which provides you your annual percentage rate. This rate, while it is not what your payment is based upon, will provide not only a true rate but also the true cost of doing business with one lender versus another.
The APR combines the specified costs being charged to obtain the loan and the risk variables that the system priced into the rate. The reason this is such a good tool is that you may well be getting a low rate, but you may be unaware of what it might be costing you. For example, lender A may be giving you 4.5 percent with an APR of 4.989 percent while lender B may give you the same 4.5 percent with an APR of 4.676 percent. The difference may be in junk fees or points also known as origination fees.
Keep in mind that what you hear, see and read may be either an advertisement, in which case read the fine print, or it may be a certified source providing the true base rates with no add-ons. Call or apply to get the real rate and then compare.