Shopping for the best interest rate possible has always been the consumer's primary objective when borrowing money. As well it should be! The challenge with this strategy is that there is much misleading information released on the subject by various media. Internet web sites and email marketing, along with other media such as radio, television and billboard advertising, has brought the importance of interest rates to the forefront of consumers' minds.
The problem for the consumer with this type of marketing is that it is designed to make the lender's phone ring. Often, the advertiser offers an interest rate at a ridiculously low price, with the intent of using a bait−and−switch technique once the client is reeled in. This is often done through short pricing. Short pricing is a term that is used when a lender offers an extremely attractive interest rate, but that rate is only locked−in for a very brief period of time.
Know up front that the average consumer enters into a purchase contract to buy a home for at least 30 days. Pricing on an interest rate locked in for a 10−day period is of no use to most prospective home buyers. It simply isn't enough time to complete the transaction. While the billboard advertising or Internet banner ad may boast a terrific rate, the lock−in period is often not realistic in terms of providing enough time to negotiate a purchase contract and close the deal. Be very careful when shopping for interest rates. Make sure that when you are quoted a rate, you are asking the broker what the lock duration is. Make sure that lock period allows you enough time to complete your purchase transaction.
Another common marketing ploy that makes interest rates appear attractive is geared around the manner in which fees are presented. All lenders are required by law to state the real cost of the financing through the Annual Percentage Rate (APR) each time an interest rate is quoted in advertising. APR takes all fees associated with the loan into consideration, and it is usually listed in fine print as a disclaimer. Advertisers often list a low interest rate in large bold type, but the higher APR indicates in fine print that one or two points are being charged to get that rate.
While APR can be helpful in comparing rates seen in advertising, it is important for consumers to know that all lenders do not calculate APR in the same way. Hence it is not an entirely failsafe method for comparing interest rates.
Additionally, the consumer must take into consideration that the interest rate is not the only important factor in obtaining financing. An equally important question to answer is, "How long do you need to borrow this money?"
The length of time you need to borrow the money has a profound impact on whether or not you should be paying upfront fees (points), and likewise has bearing on your loan program selection.
Statistically, a first time home buyer usually stays in their new home between 3.2 and 4.7 years. One of the common mistakes made by first time home buyers is electing a 30−Year Fixed Rate loan program for financing. The chance of needing the financing for 30 years is actually slim to none. Statistics show the buyer will most likely not be in the home for 30 years, and if the home buyer is somewhat transient in their job or is planning a family in the near future, the home may not really meet the buyer's long−term needs.
First time buyers are often solicited with FHA loans and other types of low−money−down programs that are contingent upon 30−year financing. The interest rates that are offered, regardless of how low they might be, are often irrelevant.
Statistically, an interest rate that is fixed for three, five or seven years is a much more realistic option for the first time home buyer. This allows the buyer to capitalize on a low introductory rate and save a significant amount of money, which can then go toward the down payment on their next home. It is of utmost importance to work with an experienced loan consultant that understands some of the practical aspects of financial planning. A well−versed consultant will ask you many questions about your short− and long−term goals, and assist you in choosing a loan program that is truly suited to those goals.
