Is the Mortgage rate too good to be true?
There are many lenders, especially banks and mortgage brokers, who will advertise very low rates. You’ve seen the promotional mail, TV ads, and website banners. However, it’s not until you read the fine print that you’ll discover that the rate may be too good to be true.
Most of the time a low rate is counteracted with higher closing costs or is offered only as an introductory rate, but initially that’s not clear. An introductory rate, also known as a teaser rate, starts as a low rate but after a specified time it can jump up higher than other locked loan rates. This can have you spending more money in the long run.
Some companies also push for Adjustable Rate Mortgage (ARM) loans, which may be a great option depending on your circumstances. If you plan on owning the home for longer than the initial fixed rate period of the ARM loan, it may cost you more money in the long run if the rate increases after that initial period. For example, if you have the choice between a 7/1 ARM with an introductory fixed rate of 2.000% for the first 7 years, or a 30-year fixed-rate loan at 2.750% for the life of the loan, you might be enticed to go with the 7-year ARM. However, after the initial fixed rate period, the rate might increase, perhaps higher than the rate you would have received with 30-year fixed rate loan. Again, this isn’t necessarily well explained by lenders in their advertisements.
Other lenders will also advertise a rate that is very difficult for most borrowers to qualify for due to their credit or financial circumstances. This may include requiring a credit score that’s well into the 800s, a very low loan to value, or other requirements.
“Some lenders advertise rates that seem very attractive at first glance. Unfortunately, they make up for it in high closings costs or in some other fashion, and borrowers might find that out too late. We’re undertaking an effort to change that”, says Ali Elwakeel, NGFCU’s Director of Mortgage Lending. “That’s why NGFCU is piloting a Dare to Compare program that encourages potential applicants to compare the mortgage rate and cost estimate from other lenders to NGFCU’s loan estimate. If we can’t meet or beat the other lender’s loan pricing, we’ll pay the member $100. It’s a win-win for the member, because they’ll find out who is providing them a truly good deal. They’ll know for sure and feel better about making such a large borrowing commitment.”
NGFCU encourages potential borrowers to educate themselves as much as possible. We provide free educational resources through BALANCE and through our Home Loan Concierge program. There are also many other free educational resources online.