It isn’t The Size of Your Interest Rate but How Well You Use It

“So what’s your rate?” she asks…

You can see that twinkle of anticipation in her eyes, almost hearing her heart pounding as she awaits your response.  You look at her confidently but it’s a front; deep down you’re stomach is churning, there’s a lot riding on your answer and you know it all too well, you’re experienced and you have been here before…

Nervously you think to yourself, “If I quote her too high she’ll leave me for someone else… but if I quote her too low, can I really be the Mortgage Broker she expects me to be?”  If you play it just right you know it can lead to more… a completed loan application perhaps??  Possibly a customized Good Faith Estimate??  Your mind begins to go into overdrive…  She looks so intent… Is she the type to sign a lock-in authorization on the first appointment?!….

You confidently look her in the eyes, put on your best smile and as you reach out to shake her hand you say…………

Of course the above scenario is a satirical depiction of the initial meeting with a client focused on nothing more than a rate, but in many ways those simple four words are the equivalent of the universal mortgage pick-up line.  The fact is that countless billions of dollars in mortgage loan originations have started with what exact question…  but is it really the right question to ask or is it just another empty line?

Many people fail to look beyond rates when comparing loans.  In their mind the lowest rate is the best option, simple as that.  But as we all know, nothing in life is ever as simple as it appears; the failure to look beyond the rate is the main difference between a savvy borrower and a novice.  In reality, there are four questions that must be asked in order to be sure that you are getting the right loan for your needs:

1. What is the NOTE RATE – Okay I cheated, that’s really the same as ‘so what’s your rate?’ However there’s nothing wrong with the question so long as it’s just the starting point and not your end point. Think of it as grabbing a drink before dinner, if you decide never to leave the bar, you’re likely going to end up alone, liquored up and sharing your most embarrassing stories with a Bartender named Chaz…

2. What are the total costs of the loan – This is the key. Regulation Z requires that you do get a Good Faith Estimate (GFE) and Truth in Lending Statement (TIL) within 3 days of taking a loan application. However, knowing what you are going to see on the GFE & TIL ahead of time is always a good idea. Loan costs can range from No Cost to 5% of the loan amount or higher (depending on the State you live in); for perspective, on a $200,000 loan, that’s a range of $0 to $10,000!

3. What is the APR – The APR is a calculation that tells you the actual cost of borrowing the money. This corresponds directly with the costs incurred.  A 30yr fixed at 5.000% with no closing costs would have an APR of 5.000%. For comparison, a 30yr fixed at 4.750% with $10,000 of closing costs can have an APR of 5.200%.  If you look at the two loans side by side, even though 4.750% is a lower rate, the reality is, when costs are figured, the 5.000% loan is the better value.

4. What makes the most sense for my plans – Some people never plan on moving, other people can’t see themselves staying in their home for more than a few years. This matter quite a bit because if you are going to pay closing costs for a mortgage out of your pocket, you need to figure out what options are most cost effective. Ask your broker for the full array of options, from no cost to full costs and then see if the savings justify the costs with the backdrop being how long you plan on having that loan. Word to the wise, the average 30 year fixed usually doesn’t live to see it’s 6^th birthday…

Knowledge is power when looking for the right mortgage.  When the time is right for you to start looking at your options, just remember that taking time to learn what is behind your rate is far more important than the rate itself…..