“Location, location, location,” is the most popular mantra for buying real estate.
A similar mantra exists for mortgage shoppers: “What’s the rate?”
Mortgage lenders have listened and responded accordingly. The internet is now inundated with generic mortgage pricing engines. It is almost impossible not to test drive one. With just a couple of clicks, an enticing interest rate is displayed before a shopper’s eyes.
Is there is any value to these pricing engines? I suppose, just as there is some value to watching a pharmaceutical company’s TV commercial. But at the end of the day, I would never consider self-medicating myself. Likewise, I would caution mortgage shoppers from thinking that they have become mortgage experts with five clicks of a mouse.
The problem with these mortgage-pricing engines is their end product. They generate an “indicative” interest rate. This rate is not guaranteed nor should it be interpreted as a loan approval. It is simply a sophisticated form of interactive advertising. Its sole purpose is to motivate the consumer into submitting a loan application. This is their dirty little secret. They are simply lead generators.
The preponderance of consumers who submit loan applications via mortgage pricing engines are usually approved at rates substantially higher than the indicative rate. This advertising practice is not illegal; but in my opinion, it is misleading. It preys on consumers who are obsessed with the rate.
Online mortgage shopping is convenient and saves time, but shopping for a mortgage should not be a race against time. Multiple factors should be considered before applying for a loan. These considerations include, but are not limited to, future employment, career changes and potential liabilities looming on the horizon.
Selecting a loan program is only half the process; the other half is getting approved. The approval process is complicated, but a good loan officer will make it appear seamless. They will ask generic questions about your income, assets and credit history. Based on your responses, they will highlight your strengths and weaknesses. All of this can be done over the telephone in about 10 minutes. It will be the most valuable time that you spend.
Upon selecting a lender, your loan officer will run their proprietary pricing engine. This engine produces “live rates” that are tailored to your specific loan program. The rate can be locked immediately or floated and locked at a future date.
Prior to locking a rate, I remind my clients that mortgage rates always consist of two parts: interest rate and points. They are joined at birth and can never be separated. I often use a playground seesaw to describe the relationship. On one side sits the interest rate and on the other side sits the points. When points are assigned a value of zero, the seesaw is balanced.
As with any seesaw, if you lower one side, then the other side goes up. In this example, if you lower the interest rate, the points go up. Conversely, if you raise the interest rate, then the points go down. Can points go below zero? Absolutely. When this happens, the points become negative and the lender “pays” the borrower to accept a higher interest rate. Depending on your situation, a “negative point interest rate” may be your most attractive option.
