Tuesday, April 10, 2007

Guaranteed Lowest Rate (GLR)

by Nancy Osborne, COO of ERATE

While this offer sounds like a can't miss proposition, upon closer examination it's not all it's cracked up to be. Many lenders are offering prospective mortgage applicants the promise or guarantee of the lowest market rate on the day in which they lock in their rate. But if you review the terms and conditions required by the lender you will see that they are indeed not offering you any great favors as their terms and conditions are next to impossible for a borrower to meet. First and foremost the rate which lenders are comparing is the illusive, difficult to compute and comprehend, APR or Annual Percentage Rate. The problem with using APR as the barometer for the rate comparison is that each lender does not calculate APR the same way. One glaring example of this is the use of pro-rated (or per diem) interest in the calculation. Lenders are allowed to use anywhere from 1 to 30 days of pro-rated interest when calculating APR and depending upon the size of the loan involved, as well as the interest rate, the pro-rated interest can amount to a sizeable chunk of the closing costs. For example on a loan amount of $350,000 with a rate of 6.00% 15 days of pro-rated interest would total $863 while 30 days would total $1,726. This difference could alter an APR calculation decidedly, by $863 to be precise.

Next, the hurdles a borrower is required to clear in order to provide the Guaranteed Lowest Rate (GLR) lender with proof or evidence of a lower rate is substantial. A borrower must typically submit a Good Faith Estimate (GFE) generated by the competing lender, complete with APR and itemized fees, dated exactly the same day as the GLR lender's, while many of the lenders have daily deadlines for delivering this documentation, for instance noon the same day. Try extracting all the required paperwork from a lender you received a rate quote from before noon the same day. The GLR lender is then permitted the time necessary to review and authenticate the competing lender's GFE under their own terms until arbitrarily satisfied that the competing lender did in fact offer a rate and terms which beat their own. During this time a borrower might lose the opportunity to proceed with the loan that actually does secure for them the lowest rate and terms. This time constraint may prove to be a horrible trade-off for a borrower as time is typically in short supply where rate locks and loan closings are concerned. Many GLR lenders also require that your loan be approved or pre-approved prior to the rate comparison in order to ensure that your loan is indeed one that they can legitimately close under your desired rate and terms. Therefore your loan may need to be far enough along in the process, having completed underwriting and possibly having satisfied all the loan conditions required to be cleared prior to ordering loan documents, before your loan could be evaluated under the GLR guidelines.

It is important to note that the Annual Percentage Rate (APR) calculation on an Adjustable Rate Mortgage or (ARM) becomes even more difficult to compare on an apple-to-apples basis. This is because many factors in an adjustable rate mortgage (primarily the future of the index to which the ARM is tied) contain unknown variables and these unknown variables must then be forecasted, projected or assumed by your lender in order to calculate the APR. This can truly cloud the basis of any legitimate comparison. Therefore many GLR lenders do not include ARM's under their guaranteed lowest rate programs.

Lastly, many of the remedies offered to a borrower once a lower rate has indeed been identified, do not truly cure or fully resolve their situation. Many lenders offer only to improve their own fees by a nominal amount (say $50 to $100) or pay the applicant a flat amount out right, something equivalent to an appraisal fee for their trouble. Given the time and opportunity cost involved, it may not be worth it.

Nancy Osborne, ERATE.com   Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.

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