Always check with trusted sources. Always check with experienced sources. Always ask a lot of questions. Never assume the person you are talking to has your best interests in mind. And…eat all your vegetables, wear clean underwear, and look both ways before you cross the street. Now you are all set with good advice for life. So what is my point to all this?

I was wondering how I lost a client the other day. I had eaten all my vegetables and had clean underwear on. But the mistake was on the client’s end it turns out. He had not checked with trusted and experienced sources.

I contacted this previous client about refinancing, and after some cursory back and forth, he said he had thought to call his current lender Wells Fargo. After talking to someone at their Customer Service Center at their 800#, he decided to proceed with them. We had not even talked details yet, and I wondered how a prior client whom I had a solid relationship with did not even check with me on final numbers before proceeding elsewhere. I then realized that with some people you need to soft sell and others you need to hard sell. And I am not a hard sell person, and this client needed to be sold hard and fast, for whatever reason, probably lack of time on the client’s part. He just wanted to be told details, what to do, and let’s get started…NOW.

So after a few days I checked in with him to have a candid conversation about this, and we realized not only was he not happy with his Wells Fargo experience after a few days, but he was getting a worse deal by a half percent than he could have! He said he was departing for a trip out of town and was in a hurry, and when Wells Fargo told him he could apply over the phone and pushed him to do so, he just did it. But after less than a week he was sorry he had done so.

This mortgage borrower wanted to refinance a $530,000 loan and he owned a 2 unit home. Wells Fargo said that although it was a 2 unit home, that they could get it appraised as a single family with an “in-law suite”, and that would be better because a 2 unit appraisal was about $150 more than a single family appraisal.

What the geniuses at Wells Fargo did not tell him is that defining the property as a 2 unit, while it does indeed cost $150 or so more for the appraisal, also gets a loan classified as a Conforming loan (Fannie Mae allows loans as high as $533,850 to still be called “Conforming” on 2 unit homes. As a single family a loan over $417,000 is classified as a Conforming-Jumbo, and is a higher interest rate. The difference is that he could have gotten 4.375% on a Conforming loan the day we spoke versus the 4.875% Wells Fargo was charging him on a Conforming-Jumbo/single family loan. That .5% in higher rate will cost approximately $156/month extra, $1872/year or $9,360 over 5 years.

Many times the people on the other end of the phone at big banks are more clerk and less mortgage professional, and don’t have the in-depth knowledge to construct the deal in the way that a seasoned loan officer might, to try and give the consumer the best deal. And even if the person on the other end of the 800# at a big bank is a licensed loan officer, they likely have very little experience, and may end up costing the consumer money by mistakenly putting the client into the wrong mortgage product.

As I said in the beginning of this blog, and as I end many of my blogs, ask a lot of questions, on any transaction make sure you are dealing with someone experienced, and take your time and make a careful decision after educating yourself as much as possible.

Rates have dropped. Rates are great. Rates are very low. All true. But I have seen this show so many times before, I know how the script goes each time.

When interest rates drop everyone gets incredibly excited. Interest rates become cocktail party chatter. The media stirs the pot, because, well, that is the media’s job, to stir the pot and draw eyeballs to their advertisements that show in between segments. So every interest-rate drop is a “spectacular plummet”, every interest-rate increase is a “major spike”, every stock market move over 50 points is the end of the world, every fire is a conflagration, and every mole hill is a mountain.

To put all of this into context is a good idea. A couple of weeks ago interest rates were 4.875% with zero points, and had been that way for quite a while (give or take). Over the course of not even a week, interest rates fell .375% to 4.5% with zero points. These interest rate quotes I am talking about are for Conforming loans only (and are subject to change at anytime), which are loans up to $417,000. For purposes of this article we will restrict interest rate quotes to Conforming loans.

Now, I am not saying that a .375% drop is not nice. Also, I’m not saying that interest rates are not at lows that we have not seen in 50 years. I am also not saying that these interest rates are not worth looking into to see if you should refinance. What I am saying is that the hysteria that I see in people that contact me or talk about refinancing in the media scares me. I have heard people say that they “heard that interest rates were as low as 3%.” Interest rates are not 3% anywhere on this planet, unless you are doing a short term adjustable-rate mortgage, or paying many, many points. I have heard people say, “my neighbor just refinanced to 2.99%…”, no, he did not. I promise you.

And the most important thing to know about refinancing is that it needs to make sense. Some people think that just because they can get a low interest-rate that a refinance automatically makes sense. But I urge you to measure how much you are spending to refinance, how much you’ll be saving every month, take into consideration that you might be restarting your loan onto a new term of 30 years, and all that needs to be taken into account. You’d be surprised how many times people are refinancing, and really should not be.

Rates have been very low for years, just about everyone I know has a fixed rate around 5% to 5.50%. So to refinance to 4.5% is suspect, to me. I’d really need to take a hard look at the savings. Saving .5% to even 1% does not save as much as you think, especially when you take into account closing costs to the title company, lender, appraiser, state-county-city, etc.

Also, a .375 drop in interest rates represents a 7.7% overall drop in the general interest rate level. Again, while this is a nice occurrence, it is not as if there is a 50% off firesale, and interest rates that were almost 5% last week, are now 2.5%.

I see behavior that reminds me of herd thinking, and that frightens me. Everybody slow down, ask a lot of questions, and make sure that your refinance makes sense before you pull the trigger and pay a bunch of closing costs, spend a lot of time, and do a lot of paperwork to execute one.

I am sure many people want to know where interest rates are at all times, but especially after the recent stock market debacle where the DOW was down almost 1,000 points at one point in the day. Of course, the story line we are hearing is that the mistaken input of a fat fingered trader at Citi is solely responsible for the error. That story is meant for an entire other blog post, but if anyone believes there are not checks and balances in place to protect from those sorts of simple mistakes, then I have a bridge for sale.

On to rates….

As the stock market has recently been sliding, what would normally happen is that people put more money in bonds and less in stocks. And that demand for bonds helps drop interest rates in general, but not necessarily mortgage rates.

Although the 10 Year T-bond went from 3.88% to 3.43% in just a few days, mortgage rates did not correspondingly fall .375% or .5%.

Interest rates for mortgages over the last few days are down only 1/8%, which is nice, but people need to realize that mortgage rates respond to numerous factors and do not move in lock-step with a certain barometer (such as the 10 Year T-bond, or the 30 Year T-bond, etc).

The future of interest rates is unclear. There is inflationary pressure on rates due to the deficit and the continued insane spending of the U.S. Government, but the weak economy seems to be a counterbalance, for now, and allows rates to stay fairly flat.

Everybody likes to offer an opinion on where the stock market is headed next, or where interest rates are headed, among many other things. So I’ll jump into the fray and offer my opinion as well. I think that interest rates are going to go higher, much higher. Or maybe even “much” lower. I know, having an opinion that covers both directions that something can move in is not an opinion, it is a severe case of CYA! Let me explain…

I really don’t want to predict, I want to educate and prompt people to think. Most of the people that think rates are headed higher think that rates will go from around an average of 5% (see: http://www.getloans.com/interestrates) to around 5.50% to maybe even 6%. That is the kind of baseless “play it safe” projection that does not mean much. It does not even sound like there was any analysis done to come up with those #’s and any analysis/research is certainly never referenced. I think its all baseless guesswork. You may as well say that the stock market is going to correct “a little bit”. It seems whenever people talk numbers, they can never bring themselves to project more than just a “little bit”. It is hard for humans to digest that numbers can change A LOT. Who would have believed that the stock market would fall from over 14,000 on the DOW to almost 6,000. NO ONE! At 14,000 all the geniuses thought that the stock market “may” correct some and that the DOW “may” fall 5%, 10% at most. Then at 12,000, when the 5-10% was exceeded, the thought was it was ready to turn back up…it kept going down. Then at 10,000 people thought, “wow, this is a bad economy, maybe we’ll go a little lower”, but it went MUCH lower.

Who would have guessed that some states would see real estate losses of 50% from peak to trough, no one! Who would have guessed that during that after that same real estate bloodbath was in progress and finally visible for all to see, that some states and cities would see real estate prices that stayed stable or went up slightly? No one.

Humans simply are not wired to believe that BIG changes can happen.

So the average interest rate is “only going to go up by a half percent, maybe a bit more,” says the consensus. And the consensus also says that because the deficit is a bit unmanageable, and because we may not be able to count on the Chinese to buy our debt forever, rates “may” likely go up by .5% to .75%.

If rates are going up .5% they are going up 3%, I hate to tell you folks! If this deficit is merely unmanageable, then I am the President of these United States!

This deficit is not only unmanageable, it is un-repayable! Literally! We will never, ever repay the money that we owe all the people in the world, that is a guarantee. It cannot be done. When you factor in the off the books entitlements of Medicare and Social Security, our deficit is $50-$60 trillion. Our annual GDP is only $14 trillion, and that is suffering thanks to the severe recession we are in. So our GDP may decline while the debt stays fixed. If we stopped spending money on EVERYTHING the government spends money on, it would take a decade or two to payoff our debt (with interest). And we all know government is not going to stop spending, they can’t even cut .001% off the budget, let alone STOP ENTIRELY!

When someone that matters (China) figures this out as well and has reason (war or politics) to slow down or stop buying our debt, rates will shoot up like a firecracker. Going up just .5% is not even in the cards.

However, can rates go down? How?! How can I even ask that when I was just making a case for rates to skyrocket!?

Look at Japan. For almost the last 2 decades Japan has been deficit spending, bailing out companies and industries (sound familiar?), abusing their currency and suffering from massive deflation. And interest rates there have been low, as they typically are in a severe recession/deflation/depression.

So even if China stops buying our debt, will the world _____ (fill in the blank with whatever word you feel is appropriate: depression, recession, deflation) stop rates from rising because there will be absolutely no demand for money? The only demand for money in a depression comes from government, but that did not drive up rates in the 1930′s Great Depression and it has not driven up rates in modern day Japan. Rates actually fell in the 1930′s, and no amount of government stimulus could make the economy move again. Some say it was the war that kick started the economy, some simply say the Depression just petered out and it was time for a recovery. But it was NOT government spending that made us recover and eventually made rates rise.

And maybe the U.S. will find itself at war with China, and won’t pay the debt we owe them back? It won’t be called a default, because not paying money back to someone you are at war with is not a “default” (yes it is), so that would delete the need for a lot of government demand for money.

The bottom line of this whole exercise was not to predict rates, clearly, it was more to get people to think “big” and to realize that anything (stocks, rates) is capable of much bigger moves than we can apparently dream of.

I have no idea what is next for interest rates, but people that think small usually think wrong.

Interest rates remain low, and have been low, for years it seems like. Although a consumer may complain about getting 5.625% instead of 4.875%, rates have been in a very tight range for quite a long time. We have not had a rate with a ’6′ in front of it for years. And I can remember when 6% was thought to be a very low rate!

Of course, the whole discussion of rates has to incorporate the price of what one is financing. Today’s real estate prices in the Washington DC metro area, even after softening of late, can hardly be called modest. Hence, I believe consumers need lower rates to enable to them to even begin to afford to pay the mortgage on a home.

As of today, you can get a loan at $417,000 or less at 5% with 0 points. You can get a loan from $417,001 to $729,250 at 5.25% with 0 points. And you can get a loan above $729,251 at 5.75% with 0 points. And you can get a full update on all loan programs, here: Interest Rate Chart.

All of those options are very attractive. The question remains, will rates go lower and should one wait to buy? Or will both rates and prices go lower? Or will rates go higher causing real estate prices to go lower? Or will rates stay the same and prices go higher?

It is hard to guess, and its impossible to know. That is why I believe if you need a home, and want a tax break, and can commit to a home and a specific area for a longer term, then it is likely safe to buy now.

Just when everyone thought rates were on a straight trend line pointing down! A few days ago, on Friday, December 4, 2009, there was a fairly bullish jobs report. Bond yields jumped up, hence, interest rates rose a bit. For a few days, I was locking-in clients interest rates at 4.75% with zero points on a 30 year fixed-rate conforming loan (which is a loan that is equal to $417,000 or less).

But as of Friday’s jobs report, interest rates jumped to 5% with zero points by the end of the day.

The question on everyone’s mind is how long can interest rates stay low. The Federal Reserve has made it clear that when they see stability in the economy they will have to raise interest rates. Stay tuned, it could be a rocky ride for interest rates.

Shopping for a loan is easy, kind of like window shopping. You poke your head in the window, take a look, maybe you go in the store and ask a few questions, maybe you go to another store, who knows. You are not obligated to buy from anyone, and you are going to check every source you can TO GET THE BEST PRICE. It’s all about the best price after all (he said sarcastically).

It is all about the best price, as long as you get what you wanted in the first place. And this is the problem in shopping for goods and services, people are so focused on the price, they lose of track of making sure they are going to get what they need. You have to ask a lot of questions, and be asked a lot of questions, to ensure the process will go smoothly and to ensure you will get the price being promised. If you are not being asked a lot of questions when you ask about a mortgage, something is wrong.

With a mortgage, people only seem to care about the interest rate, they don’t ask questions about fees, turn times, execution, experience, etc.

And sometimes, there is a need to go even deeper. It seems most loans nowadays have a twist, there may be a credit issue, a gift that may or may not be allowable, a new job, a recent career switch, or even a property condition issue. People seem to think a bank will lend on just about any property, in any condition. After all, if you have good credit, a good job, and a decent down payment, what does the condition of the property matter. Read on…

I had a potential client several months ago shopping around for a mortgage. All he was interested in was what rate I could get him, and it had to be the lowest. I tried asking questions about credit, property, etc; but he was either vague or not interested in talking about that at all.

Below is a recent email from him to me, after he had applied for a mortgage elsewhere about 30 days ago:

“Hi Brian

Please contact me when you get a chance. I would like to see what you can offer today. However, I need to speak with you about the right mortgage product.

The property I am buying was used as a private school in the past and auctioned. We plan to use it as our residence but the past use of property seems to be of concern despite the R1 zoning and residential district. In any case-if we talk, I can share more and we can determine the best course to take.

Rates are also good today- so please call me ASAP.”

Hmmm, sounds like he is having a problem getting a loan at the mortgage firm or bank that he went to because they had THE BEST RATE. And it sounds like he is STILL focused on getting the best rates, judging by the end of his email. My reply was:

“Do you have a website I can see to look at the property. I can run it by some appraisers and underwriters, to see if this is even anything I can do a loan on. Thanks.”

He sent me some data on the property and an appraisal. The appraisal showed not only was the building previously a school, but that it was missing some very critical elements any bank would want to see. My next reply was:

“I am afraid I did not need to ready any further than the first few pages. The below comments/facts on the appraisal make it impossible for any mainstream lender to do a loan on this building:

THERE IS A GALLEY KITCHEN AREA WITH NO STOVE/OVEN AREA, THEREFORE, THE
KITCHEN IS NOT FUNCTIONAL. ALSO, THERE ARE NO FULL BATHROOMS IN THE DWELLING, ONLY SEPARATE HIS/ HER HALF BATHS ON EACH LEVEL. TWO HALF BATHS NEED CONVERTED TO FULL BATHS TO MAKE THE PROPERTY MORE SIMILAR IN FUNCTIONAL UTILITY TO THE MARKET AREA.THE SUBJECT HAS RESIDENTIAL ZONING ALTHOUGH WAS CONVERTED INTO A PRIVATE SCHOOL.

So, without a full, operating kitchen, and without functioning bathrooms, this house will never get a regular loan.

The only loan that this would be eligible for, to accommodate the current condition of the home, is a construction-permanent loan which allows for odd or incomplete condition of property. And these loans are very complicated to get, a bit more costly, and they take a lot of time (60 days). You have to have a licensed General Contractor, plans & specs, a draw schedule, materials list…it is quite a lot of detail and planning to get these loans. We can talk about this type of loan, bit since your loan has been in process at another lender, and you likely have a sales contract on the property that is about to expire, would you even have time for me to get you this loan?

So I am afraid you have to either let the contract die and look at other properties, or we can talk about a construction-permanent loan (if the seller will wait for you to get a loan of that type), or pay cash for the property and then do whatever work/renovations you had planned, and maybe you could come back at a later date when the property is finished, and get a “cash out” refinance to recoup some of your money by placing a mortgage on the place after it is fully renovated.

Check in with any other questions.”

His reply was very nice and thoughtful, and he said the contract would likely die, and he thanked me for my factual and frank reply.

Wouldn’t it have been nice if he was more focused on making sure he was going to get what he needed, asking a lot of questions, allowing himself to be asked a lot of questions, and most of all NOT FOCUSING SOLELY ON PRICE?!

As always, make sure you talk to a very experienced mortgage professional, ask a lot of questions, and expect to be asked a lot of questions. It will save a lot of heartache in the end.

Is there a free lunch, or isn’t there? My last post about mortgage shopping suggested that interest rates are only a slight bit different (1/8%) from lender to lender, and that the consumer needs to focus on performance, customer service and execution more than price. But no one does, do they? And we create our own customer service problems by seeking the lowest price, and expecting the best service. It happens with mortgages, movers, furniture, contractors…you name it. We have been creating our own service and product hassles since the dawn of time.

And the reason I have chosen to write about this again is a recent client who asked me to serve a piping hot free lunch. How you ask? Read on…

These were the same clients who I was introduced to in 2003 when they bought a new house and ended up using another lender, they said the lender did a poor job, and was unable to get them qualified for as high a loan amount as he said he could. I was more accurate in what I told them they could qualify for, which is why they want to another lender who over-promised on what loan amount he could get, and also offered a lower rate. Hmmm…

In 2004 they wanted to refinance, I quoted a rate, and they of course found a better deal. If you look hard enough you can always find a better deal. One month into their refinance transaction with this other lender they told me that they were not having luck with the lender, that he had been flaky, and was not returning most calls, and they were worried if their transaction would even close. Hmmm…

Then when they got their settlement documents the loan was not what was discussed originally. Hmmm….

The lender then was not returning any calls, and they wanted to shift their business to me. As I took steps to start their loan application, they called back and said the lender finally called back and said he was sorry and had some family problems. And they wanted to give him a chance again! You might wonder how I maintained my professionalism at this point, but I did. I wished them luck.

Fast forward to 2009 and they are buying a new house, the house of their dreams in which they will spend a long time, maybe forever. This is a big deal. For the several weeks prior to signing a contract on their new home, they would call and email me on the weekend, late at night, and early in the morning. And every time I would perform and execute flawlessly, and answer questions, crunch numbers, prepare a Good Faith Estimate, prepare a Pre-Approval letter for their offer, etc. They said they loved me and they were excited to work with me on this deal. Once we were ready to proceed, I quoted a very attractive rate for a Jumbo mortgage, but they called the 800# of the lender that held their current mortgage, and got quoted 1/8% lower rate than I was offering. Hmmm…of course they did.

Now let’s stop the story. What would you do? What do you think about these people? Are they creating their own problems, again? Have they done this before, and has it gotten them into trouble before? I won’t tell you how the story ends, you create your own ending, just like in the Soprano’s!

But I think this clearly illustrates the trouble people get themselves in when they ONLY SHOP PRICE in determining their mortgage lender. STOP IT! Think about the horror stories you hear about buying a certain good or service, want to know why those horror stories happen? It’s because the providers of that service or the seller of that product are trying to cut corners and compete on price, so the service and/or product quality suffers. That is it, period, there is no other answer.

So when you call some movers to move you into your new house, after shopping all over the internet for your mortgage and suffering a delay in settlement and paying closing costs that were not what you expected; and you hear someone can move you for $1,800 when everyone else was quoting around $2,300…stop. Think, and realize your move will be a nightmare if you use the movers at $1,800. It is a certainty.

Whether a consumer is calling a bank, a mortgage banker or a mortgage broker; all mortgage providers fund their mortgages through the same sources. Because of this, mortgage rates are very close from one lender to another. I broker to over 60 banks, and have never seen rates vary by more than 1/8%.

The purpose of “advertised” rates is to get the phone to ring. I am sure no one is surprised to find out that the ad for the cheap Mercedes is not real, and that if you want all the options, powerful engine, wheels and goodies you see on the picture in the ad, the cost goes up quite a bit. But for some reason, consumers do not use the same skepticism when mortgage shopping. Somehow they believe they can get a 4.5% 30 Year Fixed Rate while the rest of the marketplace seems to be at 5% without paying anything extra or suffering from poor service. Mortgage consumers seem to want the rock bottom rate, the best service, and they want it all ASAP! I believe that the majority of the mortgage horror stories we hear about are self-inflicted and are due to the consumer “shopping” for the “lowest rate”. But did you get the best deal if your real estate settlement is delayed because the bank is not ready on time, or if the fees went up just prior to closing, or if the rate changed “because your credit score did not fit the minimum requirements”, or if you do not get your calls returned, or if the bank goes out of business prior to closing?

Mortgages are priced based on a number of variables. An accurate mortgage rate quote has to take into account your specific situation and your individual needs. There are numerous variables I will discuss, that a consumer needs to realize, when pricing a mortgage loan. There is no one-size-fits-all mortgage.

There are differences in mortgage firm business models but the net costs of processing and funding a loan are similar with all lenders. In the real world (as opposed to the world of interest rates that exists online) rates should be close to the same from one company to the next. It is pretty exceptional for a lender to be much more than 1/8% or ¼ of a discount point better than other lenders.

So how do the lenders in the newspaper or online offer rates that are below the current market rates? Some of it comes to twisting the facts, and some of it is good old fashioned SALES. Do not ever forget that when you talk to someone in the mortgage business you are talking to a SALESPERSON, not some high finance professional who is heavily regulated with a PhD and 100% integrity.

If a mortgage lender is relying on advertising to bring in prospects, they needs to have a reason for a potential buyer to call or click on their ad instead of any of the other sources to get a loan. Because mortgage ads all focus on rate, the one with the lowest posted rate will get the most phone calls. Hence the spin job known as mortgage advertising.

I’ll try and explain in a nutshell why you can’t scour the internet and expect mainstream lenders to match any rate quote you find. The list of reasons is long:

1). Most loans have so many variables, you can’t just view a rate quote online and be sure it applies to you. Rates are priced differently according to loan size, property type, credit score, occupancy type (primary residence versus investment property), how many days the rate is locked-in for (30, 45 and 60 days are common), purchase loan versus refinance loan versus cash out refinance loan, and more.

2). You have to know if the lender you are looking at is an internet lender, mortgage broker, mortgage banker, or bank. And you need to know how well staffed they are (or are not) and if they will have issue with closing the loan on time. Many mortgage providers are working with bare bones staff which will be certain to cause delay.

3). Does the loan have any prepayment penalty? Many banks will offer a lower rate, but have a prepayment penalty that they do not make clear.

4). Does the loan have any origination fee or discount points?

5). Are the quotes you are seeing current, to the day? Sometimes you even need to make sure the quote you are seeing is current to the minute. Interest rates can change daily, and usually do. Sometimes rates change 2 or 3 times daily. You cannot take the rate quote you got in line at your bank branch last week, then shop online today and find the lowest online quote, and then two days later expect the mortgage broker that your Realtor referred you to match all those quotes. Rates may have gone up, and the mortgage broker’s quote will “appear” high.

6). Did the ad give you APR rates (for a full explanation of APR see this blog: http://www.getloans.com/blog/?p=132#more-132)? Many times lenders will quote you low “rates”, but then have high APR’s, which indicates that they have higher than normal closing costs, and likely made up the low rate by charging extra fees. Most consumers are so focused on the interest rate, as if it were going to save them tens of thousands of dollars, that they take their eye off of the ball on other important details. In this case, a lender can lowball the rate by a 0.25% or so, and it seems like the best rate in town, but if they charge you an extra $500 to $1000 in fees they have easily made up the little bit of interest rate savings they have allegedly “given” you.

There is more, but its difficult to go over all the issues important to a mortgage
transaction, and all the games that a mortgage salesperson can play to quote what appears to be a lower rate. I would certainly ask for the best rate a mortgage provider can supply, but then also ask about the below, and get everything in writing:

-fees
-who will be working on your loan?
-can I directly contact everyone who works on my loan?
-number of years of experience each person working on my loan has
-turn around time for loan processing
-turn around time for underwriting
-turn around time for closing document preparation
-if any variable will change your rate quote down the line (your credit score, the state your property is in, down payment, or anything discussed in this blog post)

It used to be that if you locked in an interest rate, you’d have a chance at a lower rate later in the transaction and prior to closing via a “float down”. A float down may, for example, allow you to initially lock-in a 6% 30 Year Fixed rate with 0 points, only to float down to a 5.5% 30 Year Fixed rate with 0 points later in the transaction if rates fall during the processing of the loan.

Different banks, lenders and brokers have different terms to put a float down into affect. Some lending institutions will not float down at all, and the rate you initially lock-in is all they will offer you no matter how rates change. There logic is that if rates rose 1%, and they called you to split the difference and take a higher rate by .5%, you certainly would not, so why should they offer you a lower rate if rates fall.

A bank may offer a float down, but may charge a fee to do so, or they may float you down to 1/8% over the new, lower rate.

A mortgage broker (as opposed to a bank or mortgage banker) may simply lock-in your loan with a new lender to get you a lower rate, or to do a “float down.” In this case floating down simply means switching lenders. But a mortgage broker has to be careful in doing that, because most banks will cut them off if they do not close numerous loans that were locked in with them originally. So “floating down” is imperfect, variable and uncertain.

When I entered into the business in 1986, there was no float down, and loans took 3-4 months to process! Now things are different, and the internet helps to make lenders more competitive, faster and more transparent.

But consumers do need to be reasonable in what they expect. The float down is more to protect the consumer to the downside, and to take advantage of a big shift in rates, not necessarily to reduce the rate by every 1/8% the market may drop.

In other words, if we lock 6%, and rates goes to 5.875%, you should not expect a float down to 5.875%. A float down is not designed to give the consumer the rock bottom rate, or to allow the consumer to be a market timer, or to give the consumer the perfect transaction.

The float down, in the end, is protection so that the consumer gets to take advantage
of a big rate move down, and to avoid having to immediately refinance after purchasing a home and pay another round of closing costs to get a lower rate.

However, with the new MDIA rules (see this blog for details on MDIA: http://www.getloans.com/blog/?p=97) there may be no float downs in the future. If you lock-in a new rate, and materially change the rate and APR, it can trigger a delay in closing that no seller may want to wait for. So float downs have become difficult to impossible, and may be going away. It is best, as always, to ask a lot of questions of a lender “before” engaging them.