Why do people shop interest rates?

Roger Schlesinger
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Posted: Apr 22, 2007 10:18 PM

Before you start typing and formulating your thoughts and curses please understand one important fact: rates are made up of anywhere from seven to ten factors and posted rates,in the overwhelming majority, will not apply to you.

If that isn't enough to make you wonder , then how about the fact that rates can change 3 or 4 times in a given volatile day? Now add in the notion that one lender doesn't have the best rates for every type of loan, so you may be looking at a lender's rate which is terrific for the loan they are quoting but won't be very competitive for your type of loan. What is a person to do?

Start with trying to find out something about the broker or lender. One can go onto these companies' web sites and see what they have to say. If it seems "less than moving" or touting loans you are not interested in, or shouldn't be interested in , as in the "option arm",then move on.

What are the factors that make up a loan. Let me list them and perhaps you will understand what I was talking about in the opening paragraph.

1. Size of loan - Conforming limits, jumbo limits or super jumbo limits

2. Purpose of loan - purchase, rate and term refinance or cash out refinance

3. Type of property - owner occupied, second home or investor: 1 to 4 units

4. Qualifying for the loan - full documentation, stated income or no documentation

5. Credit profile & score - over 700, 620-700, 545 to 620 or over 500, under 545

6. Impounds (taxes & insurance) or no impounds

7. Loan to Value

8. Type of loan - fixed or variable

9. Fully amortized - 15 year, 20 year, 30 year, 40 year or 50 year

or

10. Interest Only - length of the fixed part of an arm, 10 years or 15 year

Each one of these are needed to make up the eventual loan program and rate. When you check rates can you imagine how many one would have to post to fit every situation?

That's the problem!

Back to the adage "what's a person to do" when trying to get a good rate for themselves.

Start by arming yourself with knowledge. Look at every one of the ten points above and go to work on yourself. Not one of the factors is difficult for you to understand and apply to your situation. If you approach a lender with all the information then the lender can immediately go to the right source for the best programs and rates for you.

If you catch a lender or broker who is out to deceive you, unfortunately they exist, you can readily see what is going on and take the appropriate action. Leave! Many people state that they have already signed their docs and are awaiting the funding of the loan so they believe it is too late to stop the process. As long as the loan hasn't funded and recorded it is never too late, even if you have passed the three day right of recession (on refinances). Lenders do not want a disgruntled borrower. The main benefit of being knowledgeable about your own situation is speed. If you know what you are going to need to qualify for the loan you can submit it with the loan application and the loan can be done quickly. The shorter the time the loan has to be locked to preserve a rate, the better the rate. Also many lenders give extra incentives to close a loan by the end of a particular month and this also can work to your advantage.

Once you become a knowledgeable borrower you can spend time researching special programs such as the CRA, Community Redevelopment Act, which could possibly work to your benefit if you qualify. You might find that you job classification can give you some special consideration such as a teacher, fire fighter or police officer. You can also find the property tax advantages your state might have as you approach senior citizen status.

The bottom line is nothing replaces knowledge. Don't try to convince yourself that a few simple ideas as comparison shopping, getting a good tip or talking with someone related to the mortgage industry is going to help you get the best program for you, the best rate and the best terms. Kidding yourself can be costly. Everybody knows that time is money, so spend some time to learn and save some hard earned money.