The Good Faith Estimate (GFE) is one of the worst ways to compare lenders. I must get asked for a GFE 10 times a week, and 10 times a week I try and explain that using a GFE is the wrong way to compare lenders. Below are a few reasons why:

The GFE is one of the most poorly designed forms, designed by government bureaucrats, ever conceived. There was a survey done for a large bank that found that 53% of buyers who looked at the GFE spent very little time doing so. 26% either never looked at it or don't know whether they looked at it. 49% of buyers said the GFE disclosure was too complicated, "a waste of time" or they weren't sure. Just 37% rated it useful. The form used to be a one page form for decades up until recent changes mandated by the Federal Government. Now the form is three pages, somehow with less data on more pages, and its way more confusing than before.

And the most important thing is that when comparing the loan options of different mortgage lenders, you have very few things to compare. What you should be asking is simply:

-what is the interest rate?
-what are the lender fees?

That is it. There is no need to even see a GFE. The GFE has a lot of other fees and monies on it, that are not dictated by the lender. There are fees that are controlled by a title company, or by a state/county/city (like property taxes or recordation tax). For example:

Loan Option #1
30 Year Fixed Rate, 4%
LENDER FEES:
0 points
$895 underwriting fee
$400 loan processing fee
$450 appraisal fee
OTHER:
$800 title company fees
$2,500 title insurance
$3,200 property tax escrows: 8 months at $400 a month.
$1,500 per diem interest: 30 days worth at $50 per day.
$2,000 recordation tax to the county
$11,745 total

Loan Option #2
30 Year Fixed Rate, 4%
LENDER FEES:
0 points
$895 underwriting fee
$400 loan processing fee
$450 appraisal fee
OTHER:
$750 title company fees
$2,300 title insurance
$2,400 property tax escrows: 6 months at $400 a month.
$500 per diem interest: 10 days worth at $50 per day.
$2,000 recordation tax to the county
$9,695 total

Loan Option #2 is the best one, correct? You should pick the lender offering option #2, right? Congratulations on being a smart shopper, right? No. Wrong. These two loan options are exactly the same. If you chose option #2 you chose the better salesperson, not necessarily the cheaper option or the better mortgage professional. Here is a breakdown of why:

30 Year Fixed Rate (the exact same loan type is being offered)

4% (the interest rate is the same on each option)

0 points (the cost is the same at 0 points on each option)

$895 underwriting fee (this fee is the same for each option)

$400 loan processing fee (this fee is the same for each option)

$450 appraisal fee (this fee is the same for each option)

$800 title company fees (there is a 10% variance for mistakes allowed on title fees, and this is a fee the title company controls, not the lender, the lender can fudge it down as happened in option #2, and that will help the lender make his option sound as if it were the cheapest).

$2,500 title insurance (there is a 10% variance allowed on title fees, and this is a fee the title company controls, not the lender, the lender can fudge it down as happened in option #2, and that will help the lender make his option sound as if it were the cheapest).

$3,200 property tax escrows: 8 months at $400 a month. (How many months of property taxes need to be collected to establish the escrow account is a big guesstimate, it will vary depending on what time of year you are settling, and is not one of the fees a lender is responsible to be accurate on; so you can fudge this quote downward, but it may indeed be a higher figure in reality, and the buyer will have to pay that higher figure, but you will have chosen a lender based on a fudged number).

$1,500 per diem interest: 30 days worth at $50 per day. (same concept as with the above on the property tax discussion).

$2,000 recordation tax to the county (this is a fee that most lenders have to be accurate on, and are good at being accurate on).

All you have to ask a lender is what is the rate, and what are the lender controlled fees, and that is it. That is all you need to know when deciding what lender to use. Then, when you choose a lender, you can expect a complete GFE, but realize it may not be anywhere near accurate due to the above reasons. If you really want to compare apples to apples on the loan choice, a Good Faith Estimate is not the tool to use, because the GFE has other costs in it that are not in the control of the lender. It is also a very confusing form, made more confusing in the last few years by the Feds.

Simply compare rate, appraisal fee, document preparation fees, and any other lender fees. Then always consider the experience of the individual loan officer, what type of lender you are working with (use of mortgage brokers and big banks is drastically on the decline, while use of direct lenders has been the preferred choice), what the estimated turn times are, whether or not your source was referred, and whether or not you have a general comfort level with the loan officer you have been talking to.

It seems we are doomed to repeat our mistakes. Mankind has been jumping over bushels of hundred dollar bills to reach the quarter in the corner, since the dawn of currency. I have a number of new stories every week, of consumers who look so very hard for the best deal, they overlook the fact that they may be dealing with a disreputable provider, or may not get what they expect, or may be getting a promise that won't be kept, or even worse; may be getting a price quote from someone that has no idea what they are doing. But boy do we consumers love a deal, and boy do we love to believe what we are promised.

I had a client call a few months ago and they wanted to refinance their condo. They started the conversation by grilling me on price, and I responded that I needed to know a lot of things before I could quote a price, like credit score, appraised value, debt ratios, etc. There are numerous variables that go into pricing a loan, but all they wanted to hear is what my most aggressive price was. Somehow I could not get them to slow down and hear my logic. After asking about some of the characteristics of the loan, since it was a condo, I tried to get answers to important questions that all lenders would need the answers to, like:

how many units are owned by investors versus primary residents?
how many unit owners are delinquent on dues?
does one unit owner own more than 10% of the units?
does the condo have 10% of the annual budget set aside in a reserve account?
and more…

He did not want to review these questions, he just wanted "the best price you can quote me." Then, he wanted to know if rates went down after he locked in a rate, if he could get a better deal! And also wanted to know if we'd pay the appraisal fee! Obviously this was going nowhere, and I ended the conversation, as I could not provide an accurate price quote without ALL the details. And I think if the conversation went much further, he would have been asking me if I would commit to coming to his condo once a week to clean his kitchen, mop the floors, scrub the toilets, and lend him $20. He wanted the moon, and more. This was a very unreasonable individual, I had surmised.

Then, about a month later, I saw in an email my two favorite words"

"Remember me?"

The rest of the email, from the same client I could not get answers from, went like this:

"I wanted to refinance with you a month ago, but you weren't able to quote me a low rate, and I went elsewhere. Unfortunately, my loan app fell through at the last minute with the lender I went with, because they had problems with the 11.9% of the units in the development still held by the developer. Anyway, would you accept my applications now?"

Yes, it was music to my ears. But, no, it did not make me happy. I was upset that yet another client went racing ahead to what he was sure was the "best deal" without getting all the answers he needed in advance. He jumped over a bushel of $100 bills (in this case savings of $300 a month on his mortgage with me) to get the quarter in the corner (an alleged better deal, that could not even be done, it turns out).

Had he slowed down, and let me ask all the questions I wanted to, there is one possibility, in this scenario, to get a loan through where one unit owner owns more than 10% of the units in the building. But I can't release that secret here

In the end, in our desperation to secure the last 1/8% in rate, the last $100 in closing costs reduction, and the last word in getting the best deal; we consumers tend to overlook:

service
reliability
realistic goals
and experience

I wish I could do something besides blog occasionally to remind people that they are only putting themselves in a bad position when they go for the rock bottom deal. Usually, those deals are never delivered anyway. Please be careful, ask a lot of questions, and think about other characteristics of your service providers besides price. You'll thank me.

Justin: We are on. Hey, Brian. This is Justin and we’re here with the Mortgage Market Minute. What do you have for me today?

Brian Martucci: Well, I think the topic of the day is probably going to be interest rates and the odd thing to me is that a lot of people do not realize that interest rates are up a little bit, not a lot, but people, when the media starts to hammer the public with the fact that rates are down, rates are down and they repeat it all the time.

Justin: Right.

Brian Martucci: - people just think, well, it’s just on autopilot. That thought, the rates are down, that’s it. But rates are up a little bit, about a quarter percent. I’m not sure if that means they're going to continue to go up, but rates are up a little bit and there's been some talk about the federal reserve, the next program, to bring them back down a little bit. But rates are still -

Justin: Why are they up immediately now? What is the reason?

Brian Martucci: I think it’s tied mostly to the stock market. The bond market, which is what drives interest rates, and the stock market are kind of tied together and the stock market has been rallying nicely for the past couple of weeks. So people pull money out of the debt market, out of the bond market, put it into risk, into equities. Then the reverse happens. When stocks get hammered and get pushed down a lot, people run for safety and they put money into the bond market and as a debt issuer, if you're issuing debt, i.e. bonds, and people are rushing to buy your product, you can offer a lesser return and still sell your products. So that’s when rates go down.

Justin: Okay. Well, cool. I know we talked briefly about conforming loans, the limit that has gone from $729,000 down to another number and now it may go back up again. What's that about?

Brian Martucci: Right. So, it was $729,750 to be exact starting back in 2008. It was supposed to be a temporary program. They renewed it every year and then this year, starting October 1, they dropped it to $625,500 which is part of this whole thing, getting the government out of the mortgage business thing. Some senators have come through and passed a bill, there are both Democrat and Republican sponsors, to push it back to $729,750. So I believe it has to pass the house. Nobody’s really quite sure of the odds yet, but that’s kind of in a state of flux right now.

Justin: What’s the immediate impact if that should get passed? What does that mean to the borrower that’s out on the street right now?

Brian Martucci: Well, I can give you one anecdotal piece of data. There are some clients that I have that were looking to buy an $800,000 place. They only had a 10% down payment. They were going to borrow $720,000. So under the old rules, they could get a conforming loan. Well, now that it’s been dropped to $625,000, they have to put down over 20%. They don’t have it, so they’ve been cut out of that market for the $800,000 house that they want that they can qualify for income-wise, but they don’t have the down payment for 20% down. So now they have to look at houses that are about $695,000 and under because their 10% down payment will get them to $625,000. So they're, of course, really rooting for this new legislation to pass.

Justin: So that may not put them in the areas they want to be in and therefore.

Brian Martucci: Right.

Justin: Maybe even at some point consider, well, maybe we’re not going to buy at this point.

Brian Martucci: And they may not. I mean, they had a certain – they made good money. They have good credit. They have a certain neighborhood they feel they deserve to be in and I concur. I mean, they’re qualified buyers and to go from an $800,000 home to $695,000, that’s a different neighborhood. That’s a different amount of square footage and they’re not going to take that step down, so I think they’re going to wait and I’m not sure how long it would take for them to get back into the market.

Justin: Well, so real quickly. Apart from it being a political football, what does it even matter to the government that there's a limit of $625,000 or $729,000?

Brian Martucci: Well, it is all politics and it’s all about should the government be in this sector or not? And as they start to find a way to combat the deficit, you're going to see them and it’s already on the table and they’ve not done anything about it, but the tax deduction, for example. It’s all tied into the same thing. What should the government be involved in or not? What should they subsidize or not? Government picking winners and losers and certain parameters of certain sectors of certain markets.

Justin: Right. Okay, well cool. You have anything else this week?

Brian Martucci: No. I think those are the two big topics of the day and the next time you and I chat, we’ll give you an update on those and anything else that’s important.

Justin: Excellent. Cool. Thanks, Brian.

Brian Martucci: Okay, thank you.

Justin: Talk to you next week.

Brian Martucci: All right. You too.

Justin: Bye-bye.

Brian Martucci: Bye-bye.

When you buy a new home, or refinance, it can be a nervous and exciting time. And getting excited and nervous causes people to over analyze and sometimes make poor decisions. Sometimes a client will ask for a lower rate, by paying discount points. Each discount point is 1% of the loan amount, or $1,000 per $100,000 in mortgage. It sounds great to get a rate that is a half percent lower than what you hear about in the news or see online (and shopping for rates online is not accurate, see this story for more on that), but what about the costs?

You have to look at the recapture period on points. Many times points do not make sense for most of us, and the lower rate ends up only being a psychological boost, and not a financial one. It seems we always want to find a deal that is "a little bit better." If rates are 6%, we want 5.875%, or why not 5%??? But what if rates were 1.75%, would we be angling for 1.5%? Yes! It is human nature. If rates were .5%, we'd ask the lender to give it to us for free.

Below is a typical example to see what paying points gets you:

Loan option #1:
3.625%, 30 Year Fixed Rate
$500,000 purchase price
$400,000 loan amount
2 discount points = $8,000
(each 1 point is 1% of the loan amount)
400k @ 3.625% = $1824/month principal & interest payment

Loan option #2:
4.125%, 30 Year Fixed Rate
$500,000 purchase price
$400,000 loan amount
0 discount points
400k @ 4.125% = $1938/month principal & interest payment

Most people are so happy to focus on the lower rate of 3.625%, they ignore the hard analysis of the 4.125% loan offer. The points for the lower rate are an extra $8,000, but the savings are only $114/month. To spend $8,000 to save $114/month takes 70 months to recapture the cost of the points before you even save any money! That is almost 6 years. And the banks know the average time someone holds a loan is under 5 years, so on average, the banks win on points all the time. Whether people sell their house and move, or refinance, the average mortgage won't be around long enough for points to pay off.

The question should simply be one of recapture period. What am I spending, and what am I saving? So, should you spend $8,000 to save $114/month? For most of us, who seem to refinance or move before 5 years comes and goes, I'd think the higher rate is the better deal. The answer for each of us as individuals lies in doing our own analysis.

Anyone that reads my blog knows that in general I am not a fan of Interest Only (IO) loans. I have said before that an IO loan is like putting your mortgage on a credit card. But on a refinance it may make sense if you have already built a lot of equity, are more interested in savings than equity building, and know you are not going to live in the property forever so have no interest in getting the mortgage paid off.
I had a client tell me recently that they would definitely be out of their house within 5 years, and didn't think they'd have trouble selling it, so they thought a 5 year IO ARM would be perfect. I asked them the details of their loan:

1. When did you buy the home? bought it in 2007, refi in 2010, another refi in 2011
2. What is the current rate on the 1st trust mortgage? 5 year ARM at 3.25%
3. Do you have a 2nd trust/equity line, and if so at what rate? no
4. What did you originally pay for the home? $570,000
5. What do you believe the home to be realistically worth now? $600,000
6. What is the balance of the loan amount/s? $400,000
7. Is this home your primary residence, a rental property, or a vacation home? primary residence
8. What type of property is it, condo, single family detached, rowhome, 2 unit, 3 unit, or 4 unit? SFD

I gave her the following options, so she could compare:
400k new loan @ 4.125% 30 year fixed = $1938/month
400k new loan @ 3.75% 30 year fixed = $2908/month
400k new loan @ 3.25% 30 5 Year ARM = $1740/month
400k new loan @ 3.50% 5 year IO ARM = $1166/month

So you can see the IO ARM offers the lowest payment, by far. The client already had $200,000 of equity built up, and was more interested in saving the almost $600 a month the new 5 Year IO ARM offered over her current regularly amortized ARM, even though the rates are a bit higher on an IO ARM.

And that brings me to the conclusion, which is to remember that IO ARM's are not in favor in the mortgage industry. The industry got burned on IO ARM's a lot more than other loan products, and now when you get an IO ARM you will notice:

You have to qualify at the fully amortized payment, not the IO payment.

They offer lower Loan-To-Values, so you need more equity and higher appraised values to get these loans.

They come with higher rates than other ARM's.

They have higher credit score requirements.

But, if you are after savings, have a lot of equity, then the IO loan may make sense. I still believe to purchase a new home on an IO loan is like putting a house on a credit card, but if you have a 40% down payment, maybe that is OK too? Maybe you already have enough equity?

Most people are not aware that Fannie Mae and Freddie Mac have a whole chart of pricing "add-ons". Add-ons are an amount (usually expressed in points) which are added on to the "base rate" in certain situations. Each 1.00 point is 1.00% of the loan amount. Another example is that a .25 point is a .25% of the loan amount. On a $400,000 loan a .25% is $1,000.

Some examples of situations when add-ons are required:

condo loans over 75% loan-to-value
investment properties
multi-family properties (2 unit, 3 unit or 4 unit properties)
extended lock-ins beyond the standard 30-60 days
higher loan-to-values
lower credit score
and more…

Credit scores make for a good example. Over the last few years, Fannie Mae and Freddie Mac have been raising the minimum credit scores it takes to get the best rate, which results in driving up the cost of the add-ons. Recent credit score add-ons are:

• 660-679 there may be a 2.50 point add-on.
• 680-699 there may be a 2 point add-on.
• 700-719 there may be a 1 point add-on.
• 720-739 there may be a 0.50 add-on.
• 740-779 no add-on.
• 780+ there may be a reduction in points, by a 0.25 point.

Some of the other recent add-on costs are:

Condos over 75% loan-to-value (which means if you have less than 25% down) have a 0.75 add-on.

Multi-family properties are a 1.00 point add-on.

Here is one specific example: if the current 30 Year Fixed rate is 4.25% with 0 points, but you want to get a mortgage for a condo and put 20% down, the rate will be 4.25% with 0.75 points. Or, a mortgage lender can build the add-in into the interest rate, and quote 4.50% with 0 points instead of 4.25% with 0.75 points.

Or, if you want a mortgage for a condo with 10% down and you only have a 680 credit score, it may be 4.25% with 3.25 points (results from both a 2.50 point add-on for the lower credit score, and 0.75 for the condo add-on).

Or, if you want to buy a single family home with a 5% down payment, and have a 703 credit score, you may pay a 1.25 point add-on (results from both a 1.00 point add-on for the lower credit score, and 0.25 for the lower down payment of 5%).

Since this multitude of add-ons cannot be priced into an advertisement because it is too complicated, and an advertiser cannot assume what your credit score is, what type of property you are buying and what your down payment is, many rates you'll see in public may not apply to your situation.

If you follow my blog, you know that this all ends in the same advice I always give, ask a lot of questions, assume nothing, choose a lender carefully, know as much as you can about who you are dealing with, and do not shop strictly by price.

It's that time again, the time when people seem to think a government edict can control a massive market. I have gotten dozens of calls and emails that go something like this:

"I hear Ben Bernanke is pushing rates down again."

"I hear the government is pushing rates down."

"I hear rates just dropped yesterday."

The government does not control interest rates, unemployment, economic growth, etc. It certainly influences these things with policies, either foolish or positive, but it does not control them. But every time the Federal Reserve tries some monetary gimmick, the whole country acts as if the Fed sets interests rates for hundreds of banks across the country. More on that here from a previous post.

Several Wall Street Journal articles reacting to the Fed's latest moves said:

"it may help rates a little bit at the edges…."

"The new glut of refinancing will bring about oversupply, and I am not sure who is going to buy all these mortgage backed securities. Yields may have to rise to convince buyers to buy, which offsets the point of the Fed's program."

"This may drop things 10 to 20 basis points, but its not game changing…"

10 to 20 bp's is about an 1/8% in rate, don't expect interest rates to plummet any time soon. We are already at unbelievably historic lows, see this article, rates may drop a teeny bit more, but if they do keep dropping:

a. it will be due to market pressures, not Federal Reserve programs.

b. it will be setting new precedent.

And as usual, my best advice for mortgage shoppers looking at rates, don't try and be a market timer, don't expect your mortgage provider to drop you every 1/8% the market drops, no industry can continue to drop prices as the price points change. If your rate is high, say at 6%, and you get 4.125% when refinancing, it is silly to think you should be upset and argue to get 4% if rates subsequently drop to that level. The market is absolutely overwhelmed with volume and many service providers are not even able to close these refi's, I have heard some have stopped accepting new refi applications, and others are having great difficulty and contributing to the horror stories we all hear about in the mortgage industry. Don't end up a horror story statistic, get a solid referral, ask a lot of questions, provide everything the lender wants very quickly, be happy with your historically low rate, hang on tight, and good luck getting your loan closed.

Who is this clown? Why, it's Ben Bernanke, that's who! He just said that he was going to keep interest rates low through 2013. Thanks a lot Ben, we all appreciate it. The problem is, the general public has taken that to mean that interest rates on mortgages are going to stay low through 2013. Not so.

What Big Ben was actually saying is that he was going to keep low the interest rates that he has control over, which are only the federal funds rate and the discount rate, which have very little to do with mortgage rates.

The interest rates that he controls has to do with interest rates that are charged when one bank borrows from another, for example. That may have some trickle-down effect to mortgage rates, but the biggest effect on mortgage rates is the much larger bond market. There is more power in the bond market's little pinky than all of the Federal Reserve and Ben Bernanke's clown head.

If there are further debt downgrades in the United States, or if there is some inflationary event; trust me, interest rates are going up…Benny Bernanke be damned. The Federal Reserve cannot suppress interest rates forever.

The Federal Reserve and the clown posted on this blog don't have as much power as you think. Instead of listening to Ben speak, keep focused on the bond market.

So the debt ceiling is all fixed? Too bad. What else will generate so much hyperbole from our politicians? There were stories of terrorism, global disaster, and economic meltdown. My favorite was this one from Nancy Pelosi who insisted the debt limit be raised massively, "We're trying to save life on this planet as we know it today." Rep. Michelle Bachmann worried that raising the debt limit at all would be "like saying we embrace being Greece." It was fun to watch. Rep. Maxine Waters said the final compromise bill "may be the single-worst piece of policy to ever come out of this institution." Maxine needs to brush up on her history, this comes nowhere close.

It seems in general people are happy this is over. But I am not sure what everyone is celebrating as far as the "debt ceiling deal". Maybe that is why the stock market was down 265 points today and has been down 8 days in a row?! Government did not "cut" the deficit, and they did not "cut" spending. THEY ONLY SLOWED THE GROWTH OF SPENDING. They cut the "future growth" of spending. Why don't people understand the word game that is being played?  This deal will "cut" the 2012 budget of $3.6 trillion by just $22 billion, or less than 1 percent. There, that is the only "cut" that we got. The deal kicks most of the cuts to the back of the Congressional Budget Office's 10-year spending window, which means they may not occur at all.

And we were never going to DEFAULT! We were always going to pay the interest on the debt, we were not going to default on the debt. Default is when you do not pay your debts. We would have been forced to cut spending on some programs and all the goodies we love to have until this was resolved, but we were never in danger of default. We would have paid our debts that were due. So thanks to rhetoric big spenders won and fiscal sanity LOST!

Both sides acted like eight year old children whose brother just took the last cookie at the dinner table. The extreme ideologues of the political parties sicken me. And the reality is that we cut NOTHING. If anyone would bother to slow down and look at the real numbers, all the geniuses on Capitol Hill did was slow the future growth of our spending (most of it back loaded). It's like me saying I want four new Porsche automobiles next year, but instead to be cost conscious I am only going to borrow enough money for three. How is that cost cutting? I can't afford one new Porsche in the first place; let alone 4 or 3! And our country can't afford to spend $3 trillion, or $4 trillion, or any trillion! What don't we all understand about the fact that we are broke! And we cannot keep borrowing massive amounts.

All we have done is masterfully disguise what will be continued growth in reckless, unaccountable, big government spending. But the markets will not be fooled, even if we were. That means a debt rating downgrade soon, which makes it more costly to borrow, and will limit our ability to borrow as much as we are used to borrowing. Rates will go up when the market figures all this out, thanks Congress. Trust me, in the end the markets are never fooled. It is time cut all the pet projects beloved by both parties, we'll be forced to pretty soon. We have too much government, and too much government spending.

I'll leave you with some Thomas Jefferson quotes. If you think Jefferson a fool, then you may be a lost cause:

"It is incumbent on every generation to pay its own debts as it goes.  A principle which if acted on would save one-half the wars of the world." by Thomas Jefferson

"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them." by Thomas Jefferson

"My reading of history convinces me that most bad government results from too much government." by Thomas Jefferson

Everyone wants to get the best deal reasonably possible when getting a mortgage. I say reasonable, because although some lending sources advertise what seem like unreal rates, most consumers are smart enough to discount what appears to be a free lunch. The reality is that even with hundreds of competitors, rates never vary by much more than 1/8% in rate. But hey, who does not want every 1/8% to be in their favor?! I do. So go for it. But here is the problem with shopping for that best 1/8% deal online:

there are dozens of variables that go into quoting a rate.

Some of the numerous variables that go into quoting rates are:

-down payment
-amount of points charged
-geographic location
-housing type
-credit score
-lock-in days needed
-loan size
-purchase versus refinance

Lenders will put their lowest rate quotes online, which are always based on the highest credit score, the largest down payment, the shortest lock-in period, etc. And often times lenders will not clearly state exactly what the loan is for. They may quote the below:

“30 Year Fixed Rate, 4%!”

But they do not tell you it is only for loans below $417,000, that there are 2 discount points required, and only for purchase loans, which can close in 15 days or less, with credit scores above 780. Those limitations cut out a huge swath of consumers that may be looking at the online ad.

Is the ad designed simply to make the phone ring? Yes. Do people that see the ad all believe they can get 4%? Yes. And if they are talking to their local lender who is telling them they can get a rate at 4.75%, with 0 points, for a $650,000 loan, with a 45 day lock-in, for their 710 credit score; they do not understand why they cannot get 4%, since they saw it online! Of course the online ad did not mention it is not suited for loans over $417,000, that it won't allow for a 45 day lock-in, etc.

Some online ads may have even more detail, and may say:

“30 Year Fixed Rate, 4%, 2 points, 30 day lock-in, for loans up to $417,000”

That is a fair amount of detail, but it still lacks credit score requirements, property type requirements, and other details that may raise the rate. And the reality is that if lenders put every single variable that affected every single rate quote, they would have advertisements that ran pages and pages long to cover all of the details and variables of each rate quote scenario; and nobody would read those ads.

If I believed everything I read online, I’d have a full head of hair with no bald spot, I’d be rich from flipping homes with no money down, I’d have 4 Russian brides beating down my door, and apparently there are numerous Nigerians ready to wire me millions of dollars if I’d only send them a $5,000 fee to help them with some modest fees to make the transaction happen.

This is why you cannot rate shop online. There are too many variables, too many scammers, and too many people willing to post something online simply to get you to call, and then switch you into a loan product or rate quote that you really do qualify for. And why would you choose a lender simply based on who had the most effective ad that made you call them? Why wouldn't a lender be chosen based on experience, ability to perform, efficiency, transparency as well as their interest-rate quote? It would be nice if a lender were referred or if you had some knowledge of their prior track record.

There are numerous examples of people who get upset or curious after seeing a low rate online. But after some analysis, we find that there was a situation or variable that did not allow them to get the “best rates”. These situations are commonplace. Examples of scenarios that may have to pay a slightly higher rate than others:

-a condo will pay a higher rate than a single family home.
-two unit (i.e. duplex) will pay a higher rate than a single family home.
-a 700 credit score is a higher rate than a 740 credit score.
-a cash out refinance is a higher rate than a purchase loan.
-an investor will pay a higher rate than an owner occupant.
-a 60 day settlement will pay a higher rate than a 30 day settlement.

I could go on for days, but I think you get the point.

While I am at it, I get an awful lot of calls from clients who quote rates that sound really low based on a news story, too good to be true almost. Are they? Of course! Once a month the media does a standard news story on the “national average interest rate”. The problem is, the average interest rate is too average! What do I mean? You can read more here. But just know that when you hear a news story about the average interest rates, those rates will usually not apply to a specific scenario.

So the moral of this story is online rate shopping is OK if used as a very rough gauge, but don’t even expect to get exactly what you see online, since the rates posted online are not accurate for all scenarios, and are only designed to make the phone ring!