Many homebuyers ask how to shop for interest rates, but they often make a critical mistake: focusing only on the lowest number. To get the best deal, you must look beyond the rate and understand the costs, fees, and discount points attached to it.
The Common Mistake: Focusing Only on the Lowest Rate
So the big problem with people in shopping the rates is most customers are just focused on the rate itself and not the cost associated with that. So they call around multiple lenders, they say what’s your rate, what’s your rate, what’s your rate?
And then the lenders give them their rate and then typically they’ll go with the person that quoted them the lowest. The problem with this is that every lender can offer the same rate. The quotes you’re getting depends on what the lender wants to offer as far as a rate that has no discount points, or rate with the credit, or rate with discount points.
What Are Discount Points? The Hidden Cost of Low Rates
Discount points are a charge that you’re paying to buy down your rate. So the problem with this is loan officers with rates that aren’t so good, they understand that if they quote the higher rates that are normal they’ll get shopped. So what they do is when they get somebody who calls in, they say “hey what’s your rate,” they’re going to quote them a really low rate but what they’re not going to tell them is that that rate comes with 5, 10, $12,000 in discount points. So basically a charge to buy down that rate.
And what they know is that the customer is going to be hyper focused on what the interest rate is and not so much what the costs are. So they’re going to be thinking they’re getting a great deal with a great interest rate, but in reality the person is just charging them and making them pay for that.
The Strategy: Compare Fees at the Same Interest Rate
So, the best way to actually check to make sure you’re getting the best rate if you’re talking to multiple lenders is you need to have each lender quote you the same exact rate and then you need to get have them give you a fee worksheet breaking down all their costs and specifically focusing on the section that goes over lender origination charges. Because that is what a lender is charging you to do their portion of the loan, whether it’s processing fees, underwriting fees, origination charges, or discount points which are basically the charge to buy down the rate.
So, if you’re talking to multiple lenders you have each one of them quote you the same exact rate and then give you the fee sheet showing their cost. You’re going to see who’s offering the best rate with the lower cost, rather than just focusing on who’s quoting it the lowest.
Because if you call me up right now I can just offer you the lowest rate possible and not tell you that it’s being charged a whole bunch of fees and it doesn’t necessarily mean I’m the best. It just means I’m offering the lowest, but you may be paying for it.
So to truly make sure that you’re shopping correctly you don’t just focus on the rate you need to focus on the costs that come along with that.
Understanding Your Loan Estimate – Focus on Section A
Once you actually go under contract, so if you’re purchasing a house, once you’re actually under contract, or if you’re doing a refinance once you actually complete the application you need to make sure that you get a locked-in loan estimate.
When you get a loan estimate and the rate’s locked in, they have to disclose all the fees that they’re charging to you. You want to specifically focus on Section A of the loan estimate. This is the origination charges where it shows all that processing, underwriting, discount points for the rate, origination charges.
If those fees are significantly higher than what they had quoted you on their fee sheet before then you know they’re probably lying and something’s up and you may want to shop around a little more, talk to somebody else that you talked to before.
But doing this will help prevent you from being overcharged by a lender who just has terrible rates and they’re throwing a low rate out there to try to suck you in.
Verifying Your Lender – Reviews and Reputation
Another thing you can do is look them up online, check their reviews, see how many positive reviews they have. See what the community is saying about them.
Because also there’s a lot of shady people out there too that will try to do whatever they can to trick you lure you’re in to get your business.
So you want to make sure that they have a reputable reputation online, too, in that the numbers they’re providing you are more than likely accurate. Because I’ve also seen a lot of times where people will do shady stuff, hide the fees, hit them with it at the end. But by that time you’re already sucked into the deal, you can’t really move at that point.
So like I said, rate is important, but you also need to focus on the costs associated with it too. Because you want to make sure that you’re not being overcharged by the lender for the rate that they’re offering.
