Borrowers and lenders are locked in an eternal conflict: Borrowers want to save money by obtaining the lowest interest rate; lenders want to make money.
When a borrowers learns a loan rate, however, that often is not the rate ultimately received.
As Jack Guttentag has noted in Inman News, there are both justifiable and reprehensible reasons.
Among the justifiable reasons is that lenders cannot have a good idea what will be the cost of money at the time they offer a loan. They won’t lock in a rate until they have a measure of certainty.
Because the market is always in flux, they change their rates every morning and often during the day.
Another acceptable reason is that information provided by or about borrowers may be either incorrect or out of date, making them greater risks and thus worthy of only a higher rate than one originally quoted.
When it comes to sleazy lenders, one tactic is lowballing prospective borrowers to snare a customer.
A second approach is to take advantage of market volatility. Guttentag, A Wharton professor emeritus of finance, puts it this way:
If the market price goes down, the borrower is charged the price quoted earlier, and is probably content, since he received what he was quoted. If the price on the lock date is higher, on the other hand, the borrower will be charged the market price or higher, because “the market went against you.”
The mortgage expert’s account of what he calls scams also refers to the value of the borrower’s new property. Since rates partly depend on property value, scummy lenders play the difference between an initial estimate of a property’s worth against a thorough appraisal that takes place later.
If an appraisal comes in too low, the lock is invalidated. If too high, the lock is kept, and the borrower is none the wiser of how the altered loan-to-value ratio could have lowered the rate.
Fortunately, lenders don’t hold all the cards. In a second column on rate locks, Guttentag provides pointers that consumer can use to protect themselves. Borrowers, he says, can obtain direct access to loan rates and proceed with that knowledge.
When it comes to mortgage arcana, Guttentag is your man.
Tomorrow: Imperfect pitch
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