The truth about online rate quotes

When shopping for a home loan, it’s easy to feel overwhelmed. Ads are literally everywhere --so how do you cut to the chase and find the best rate for you?

One crucial step is to examine the actual numbers.  These numbers include the rate along with the lender fees associated with that rate. Lender fees may consist of points, origination fees, or unnecessary charges that large lenders often impose.

In summary, the lowest interest rate offer doesn't always provide the best deal. Frequently, that lower rate comes with numerous lender fees, including points and other unnecessary charges.

Beware of Big Lender and Online Advertisements

We all understand how easy it is to be misled by low "teaser" rates promoted on TV and online. Lenders generally advertise a standard rate for everyone, often accompanied by small disclaimer text that is difficult to read, or in TV and radio ads, spoken so quickly that it's hard to catch. That doesn't seem like full transparency to me!

The reality is that this rate is the most favorable they offer for an ideal borrower and property situation, and even if it's accurate, it's unlikely to apply to you. Keeping this in mind, here is a list of specific factors that will influence the interest rate you might receive. As you can see, a rate quote advertisement cannot account for these variables to give you precise information until a loan officer gathers some details from you.

Here are the factors that affect the rate you receive.

• Home price and loan amount: The amount you borrow is determined by subtracting your down payment from the home price, which influences the interest rate.

• Down payment: Generally, a higher percentage down payment equals a lower interest rate.

• On a refinance: the rate is affected by the loan to value (LTV). LTV is calculated by comparing the loan amount to the appraised value. Higher LTVs will have higher rates on conventional loans.

• Loan term: Shorter terms (like a 15-year or a 20-year) typically have lower interest rates than a 30-year term.

• Interest rate type: Interest rates come in two basic types: fixed and adjustable. Fixed rates do not change over time. Adjustable rates, on the other hand, have an initial fixed period then go up or down based on the market. For example, a 5-year ARM loan will have a fixed-rate for the first 5 years and then the rate will fluctuate from the 6th year onward.

• Loan type: Different categories of loans (Conventional, VA, FHA and USDA) have different rates.

• Credit score: Based on credit report information sourced from the 3 major credit bureaus, Transunion, Equifax and Experian. Each bureau has a different formula that results in a credit score -- commonly called a Fico score --based on your credit history and credit usage as well as available credit. Lenders use the lowest middle score of all borrowers.

• Property type & usage  Primary residence gets the best rate followed by a second/vacation home and then higher still is a rental property.  Condos and manufactured homes typically have higher rates

Another common problem with getting a rate quote

You often get one from Lender A on Monday, Lender B on Tuesday, and Lender C on Wednesday. Rates can change daily, sometimes multiple times. Therefore unless you get all your quotes at the same period of time, you don't have accurate information

and may end up going with the wrong company.

Many lenders purposely quote rates lower via their web sites to simply get you to stop shopping around. This is especially true for purchase loans, as you most likely will NOT be in position to actually lock that rate today.

THE ONLY RATE QUOTE THAT MATTERS IS THE DAY YOU LOCK.

DID YOU KNOW? You can usually pick any interest rate or total lender fee you want. Just understand selecting one always affects the other. Want lower lender fees? Your interest rate goes up. Want lower interest rate? Your lender fees go up!

Be wary of a lender with significantly lower rates and closing costs than anyone else.  All lender rates are derived from the same mortgage backed securities market

(MBS) - with larger lenders typically needing a higher profit margin-- they charge more to cover their increased overhead.  The bigger the lender, the bigger their overhead. They have to charge more to pay for those high priced TV ads and stadium naming rights.

Smaller, well managed lenders --like a mortgage broker are often much cheaper than big lenders. mainly due to much lower overhead.

What you pay is the wholesale cost of money plus the lender markup--and all lenders--big and small-- have pretty much the same cost of wholesale funds.

So it's their markup, or gross profit that decides how much that lender charges on a given day. the markup is a combination of points, origination fees and other garbage fees like underwriting, admin, funding fee, and super high loan processing fees.

And another way a lender increases their profit is by charging a much higher than market rate while reflecting super low lender fees. However the rate is way way higher than it should be. Higher rates means more money flows to the lender upon delivery of the loan.