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6/7 MORTGAGE COLUMN: Knowing your true interest rate

Borrowers have often asked me why their interest rate is higher than what they saw on the TV or newspaper. I can answer this question with a simple answer: Rates are inaccurately advertised.

To understand this practice, I begin with a typical newspaper which quotes either Fannie Mae or Freddie Mac. The rate readers will see is what’s known as the core or base rate. What readers don’t know is that once these rates are inserted into a borrower’s loan application, automated systems — Fannie- and Freddie-owned — begin adding onto the base rate for a number of variables.

For instance, if a borrower’s credit score is less than 640, 680, 700, or 720, rates will be adjusted upward. Further, if the borrower is buying a condo, the rate is adjusted up, and the same applies for loans that include investment, cash out refinances and loans without sufficient equity, etc.

In other words, borrowers who shop for rates and use this type of advertising to base their decision of whom they will use for their mortgage are bound to be disappointed with the end result.

Another source of frustration is the firms that actually quote a rate in an advertisement. These firms know full well that they cannot in good conscience provide an accurate rate as they must input a borrower’s info, credit, etc., to actually quote an accurate rate.

A suggestion to borrowers searching for the best rate is the old standby: If it sounds too good to be true, it usually is. The next time you see a rate at 4.875 percent, ask the representative what the true rate will be based upon your situation. Be sure to ask if this means paying points and what the actual fees are. While one lender may offer you 5.25 percent without points, another lender may offer 4.875 percent with two points costing you more money than the lower payment is worth over time.

Meet with an experienced lender and be sure to compare programs, fees and return on investment if paying points. Compare fees and be sure that your low rate is not being subsidized by higher fees.

Finally, always remember when you hear a rate offered that it is not true until you lock the rate. In the past, many borrowers heard what they wanted to hear in a lower rate, yet ended up with a higher rate or more points. In today’s highly regulated environment, it is more difficult for this to happen, yet borrowers need to be vigilant early on in the process.

Lock your rate if it is reasonable to your expectations, and confirm it in writing. If you float the rate, you are vulnerable and can only blame yourself if rates rise.

Joe Adamaitis, the area manager with Academy Mortgage, can be reached at (941) 706-5695

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