Is My Lender Pulling a Bait and Switch?

Posted by  on Jul 08, 2010

Dear Liz,

I have been watching mortgage rates in California, where I live, for some time. I wanted to refinance when they were at their lowest. Well, the best mortgage rates are very low, and I checked with my bank and the mortgage quote was almost a full percent higher than what was advertised! The loan officer said it was due to "add-ons." Should lenders have to advertise their rates including the add-ons? This seems like a bait an switch tactic, which I thought was illegal.

Why Advertised Mortgage Rates Don't Always Hold Up

There's a reason that stockbrokers don't advertise prices of companies' shares in newspapers. It would be pointless because the price of shares moves constantly depending on supply and demand. No one with any understanding of financial markets expects it to be different--hence the moving ticker-tapes across the bottom of the screens on the cable financial and news channels.

Today's mortgage rates move in a similar way. They are based on the prices of mortgage-backed securities (MBS). These are publicly traded securities backed by hundreds of thousands of mortgages. Their pricing pretty much tracks that of bonds. Because they are securities, traded just like shares of company stock, their pricing fluctuates in a similar manner. So mortgage quotes are often good for only a few hours.

So, Why Do Mortgage Lenders Bother Advertising?

Mortgage advertising is a holdover from an earlier tradition. In the not-too-distant past, advertised rates were good for a week, or at least a few days. Mortgage lenders weren't facing the stiff competition they do today, so they usually had some wiggle room built into the pricing. They don't have that luxury anymore. But people still expect them to advertise rates, so they do. Just note the fine print: Rates are subject to change without notice.

Mortgage Quotes and Risk-based Pricing: Get Used to It

Another relatively new development in mortgage quotes is risk-based pricing. When you bought your house, this probably wasn't in effect. Typically, prime mortgage applicants were either approved or declined, period. Approved applicants got the same rates. Today, even prime borrowers get mortgage rate adjustments based on their credit-worthiness. This is similar to the grading used in sub-prime lending. So, while a borrower with a 760 credit score, buying a single family residence, and putting 25% down gets the sweet mortgage rate advertised online, the one with a 619 score, refinancing a condo, and taking cash out to 85% of the property value pays more--seven points added to the fees, or more than one percent to the interest rate.

There Are Alternatives

First, get several mortgage quotes. Have loan officers run the numbers for you and get pricing for both FHA and conventional loans. FHA home loans have no pricing adjustments. The other thing you can do is work on your credit, reducing account balances and paying on time. Even a few points of improvement can make a huge difference. Ask the loan agent how much you'd save if you increased your score by 20 or 40 points. The difference between 679 and 680, for example, at an 85% loan-to-value condo with a cash-out refinance is 1.25%. On a $200,000 mortgage, that single point is worth $2,500 to you!


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