August 31, 2007, Newsletter Issue #79: How to Know an Interest Rate is “Legitimate”

Tip of the Week

If you are shopping for a new mortgage, you need to be very careful and specific. Be aware that most of the people with whom you will speak generate most or all of their weekly income is generated from originating and closing mortgage loans. While the overwhelming majority of mortgage brokers are honest, dedicated professionals, there are some people that will attempt to continue your discussion by giving you a rate that is legitimate today but may fluctuate tomorrow. While this is perfectly legal, this rate is basically useless to you.

Here is an effective and safe (for you) way to protect yourself and get a good interest rate, too. First, learn what the current market rates are before you shop. For instance, if the market rate for a 30-year fixed rate mortgage is 6.00% and a mortgage officer tells you he/she can offer you 4.75%, one of two things is true: 1) the loan officer is not being truthful, or 2) there are multiple points, probably 4 or 5 at least, involved in this loan.

Second, if you are given a rate that appears to be fair (including any points to be paid), ask the loan officer how long this rate will apply to your application. If there is no rate lock, or this rate has a lock of less than thirty days, this rate, once again, is probably useless to you. If rates are projected to decline in the next 30-45 days or are expected to be very stable, you might consider taking the risk of letting your quoted rate “float”, hoping it will decline at your approval date or at least remain the same.

If mortgage rates are unstable or increasing, request the rate to be locked for 60 days before you make a formal application. If there is a fee to lock the rate you have been quoted or if the rate increases slightly for this lock (one-eighth to one-quarter per cent), make a decision on the reasonableness of this cost. Under these market conditions, it is almost always in your best interest to take the rate lock to avoid any unpleasant surprises. Finally, do not accept a purely oral guarantee of any rate lock. Always get confirmation of your rate lock in writing. No exceptions. This approach will protect you and make the mortgage loan process a more comfortable experience.

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