Why are rates in the Internet Always Lower?

Saturday, February 9, 2008

Why are the rates in the Real Estate Section of the newspaper .25 - .50 percent lower?

That is the question I was recently asked by a customer. To him I responded; "that's why we call it the liars section". If you advertise in that section to draw business, clearly you are selling on rate. We have trained a consumer to ask what the rate is instead of "What is the APR" you see, if all you have to sell on is rate, there is apt to be someone above you on the list and someone below you willing to lie just a little bit more to get your business.

More importantly, consumers aren't apt to check the APR to determine the true cost of their credit. For Example, when you check BankRate.com today, they give you the national average overnight which last night was;

Notice that even BankRate.com doesn't bother to disclose APR. I find that interesting because according to RESPA, if you are advertising a mortgage rate, you must also advertise, in the same sized print, the corresponding APR.

If you go beyond the front page of BankRate.com's liar's page, you will see the following under the heading;

Mortgage Analysis

"The rate on the 30-year fixed has remained below 6 percent for more than a month now. Many homeowners applied a few weeks ago to refinance their mortgages, but latecomers continue to apply. According to the Mortgage Bankers Association, refinances accounted for almost 70 percent of applications last week, and brokers report a fresh round of inquiries this week".

Notice that when you get beyond page one on BankRate.com, you will get to the true "weekly average" which reveals a true rate closer to 6% than 5%. Most of the advertisers on those liar's pages aren't actually lenders, they are lead generators. Therefore if you do respond, to them, you will more than likely be inundated by phone calls at dinner time and SPAM in your inbox from numerous mortgage lenders looking to offer you a realistic mortgage rate.

In other words, if I intend to advertise a rate today of 5.00% for a 30 year fixed rate mortgage and I knew that rate is .57% BELOW the national average, which according to BankRate.com it is, then I need to disclose the APR reflecting the POINTS it will COST the buyer to obtain that rate. A quick survey of the WHOLESALE rates of 4 major US Banks (notice I said wholesale, meaning unless you are a state licensed mortgage broker with a reseller agreement in place with the bank, you do not have access to these rates) revealed Friday Feb. 8^th it would cost you 2 ½ Points or $2,500 per $100,000 borrowed and that is just to break even, that means the lender makes no money whatsoever! If you accurately disclosed that cost in your Truth in Lending Statement the 5.00% 30 Year Fixed Mortgage would have a corresponding APR of at least 5.420%.

Most lenders in the Raleigh-Durham –Chapel Hill area operate on a 1.5% gross profit margin. That's pretty slim. Imagine if your business operated on a 1.5% gross profit margin, could you do it? Would you be able to meet payroll? Probably not, but that's ok, because we are looking at an average loan of $300,000. So to look at that same rate, it would cost you $15,000 is closing costs to get that 5.00% Rate!

The monthly payment on $300,000 at 5.00% Rate/5.442 APR would be $1613 per month, but It cost you 15,000 to get to that payment. The same loan with 5.50% Rate/5.574 APR but only ½ point or $1500 is $1706 per month is clearly the cheaper loan even though the payment is $93 per month more in interest, it will take you 161 months or 13 ½ years of mortgage payments before the latter loan is more expensive. You are better off in that case taking a 15 year fixed rate mortgage!

So, to recap, there is no such thing as free money. Everyone gets their money from the same sources. Yes, some are going to be cheaper, more than .25% cheaper is almost unheard of. And remember, you should ALWAYS be asking for the APR, not the Rate. See my earlier post titled;

What is the difference between the "Note Rate" and "APR"?

Finally, rates change daily and yes, sometimes numerous times a day given sufficient economic activity. In order to advertise in the Saturday real estate edition of any newspaper, you must have the rates in no later than Thursday. That means any rate advertised in print, probably doesn't have any real legitimacy unless it is a high rate!

You may also want to download my "Practical Fax Flyer, Practical Questions to ask a Mortgage Lender"

I hope this information was useful and helps to answer your question. If you have responded to any of those advertisers, please comment on your experience.

Thank you,