If you’ve ever seen or heard mortgage advertisements on TV, the internet, or the radio, you’ve probably heard some pretty exceptional interest rates advertised. By law, all advertised rate quotes have to be legitimate, meaning the lender can’t advertise them unless they can truly deliver on them, but there’s plenty of gimmicks buried in the fine print that make them unrealistic for most people. It’s important to be aware of these gimmicks so you don’t get sucked in by a quote that sounds great at first, but isn’t realistic.
Mortgage shoppers are often under the impression that mortgage quotes are a one-size-fits-all affair. Not so! Not only will your qualifications have a lot to do with what rates and fees you pay, so will the amount you borrow, the type of loan you select, and how the loan is structured. Lenders take advantage of the complexity and opacity of mortgage rate pricing to structure an advertised rate so that it sounds insanely attractive and you can’t wait to pick up the phone and call.
The following are some of the most common tricks lenders use to advertise super low rates:
- Advertise a short loan term – Short loan terms like 10 and 15-year fixed loans usually have much lower rates than the 30-year fixed. Lenders will often advertise the rate for a 10-year fixed loan because it’s so low, but bury the fact that it’s a 10-year loan in the fine print. Most people will never take out a 10-year loan because the payment is so much higher than other loan options.
- Assume a short rate lock term – Rate locks cost lenders money, so the length of the rate lock can significantly impact the pricing on a loan. The longer the rate lock, the more expensive it is. One trick lenders use is advertise a loan with a very short rate lock term – or none at all. There are lenders out there that used to advertise insane rates on the radio, but when you called, you discovered that they wouldn’t lock the rate until just before closing. Who the heck wants to do that? It can take 45 to 60 days (or more) to process and underwrite a loan, which means you would be exposed to the whims of the market for that entire length of time.
- Assume a large loan amount – Larger loan amounts tend to get lower rates at lower cost than smaller loans because the larger loan balance generates more interest. It’s very common for lenders to advertise deals based on a $417,000 loan amount, which is unrealistic for most people. If your loan amount is smaller, you may pay a higher rate and/or fees for the loan.
- Assume lots of equity – More equity means less risk for the lender, so low loan-to-value loans scenarios to get much better deals. So most rates carried on advertisements are based on a 60% or 70% loan-to-value, which is unrealistic for many mortgage shoppers. If you have a higher LTV, don’t expect to get as good a deal as advertised.
The “fine print” in a TV ad or newspaper is usually where you’ll find the assumptions used to generate the rate quote, but often it’s so small you can’t read it. If you pull out your magnifying glass, you might see something like the following: “Rates based on $417,000 loan amount, 60% loan-to-value, with escrows, and 120 equal payments.”
Most people won’t need or get loans that large, have a 40% equity position in the property, nor will they want a 10-year loan (120 payments is a 10-year payoff) because of the much higher payment. In short, this scenario is unrealistic for most people. But the rate quote looks impressive in the ad, right? That’s the idea! They want to throw out a good rate and get you to call!
In some ways, you can’t blame lenders for doing these kinds of advertisements because it generates leads, which is important for them to stay in business. However, you don’t need to fall for it. The devil’s in the details, so it’s important to read or listen to the fine print to find out what mortgage product is being advertised and what assumptions the quote is being based on.
Advertisements Can Be Days or Weeks Out of Date
Another thing to keep in mind is that advertisements are created days or weeks in advance of running in your local newspaper, on TV, or on the radio. Nobody can tell what rates will be in the future, so all lenders can do is advertise the rates as of the day they cut the ad. By the time you see or hear the ad, it could be days or weeks out of date and rates could have changed significantly.
When Shopping, Make Sure You’re Comparing Apples to Apples
Watch out for of these tricks when you’re shopping different lenders and comparing offers. When you’re shopping different lenders, it’s essential to make sure the quotes you’re getting are based on the same assumptions. The most common assumptions that can impact loan pricing are the following:
- Type of Loan – ARM, fixed-rate loan, 30-year fixed, 10-year fixed, etc. Different types of mortgage products and loan terms will price differently.
- Rate Lock Term – Again, longer rate lock terms are more expensive and will be reflected in the pricing. Make sure all lenders you’re shopping assume the same rate lock term.
- Loan Amount – As I mentioned before, larger loans tend to get better rates at lower cost. Make sure all loan offers assume a similar loan amount.
- Property Value – Loan-to-value has a big impact on loan pricing, so if the lender is using an unrealistic inflated value to generate a rate quote, it could look like a much more attractive deal on paper. Make sure all rate quotes are based on a similar and realistic appraised value.
- Escrows or No Escrows – Whether or not you want an escrow account so your taxes and insurance is paid as part of your mortgage payment can have an impact on loan pricing. Make sure all lenders are using the same assumption for this.
All of these factors can significantly impacting the pricing on a loan, so it’s important to make sure all the rate quotes from the lenders you’re shopping start with the same assumptions. Make sure you’re comparing apples to apples, not apples to oranges!
Wrapping it Up
Understand that just because a lender uses gimmicky advertising to get you to call doesn’t mean they won’t give you a great deal. The whole purpose here is simply to make you a savvier mortgage shopper so you can cut through the hype and figure out if a lender’s offer is truly beneficial for you. When you see exceptional mortgage deals advertised, it’s important to look closely at the fine print to see if it’s a deal that’s realistic for you. If it is, then great, you’ve got yourself a great deal! If not, you haven’t wasted your time on something that’s not likely to pan out.