Wednesday, May 19, 2010
Interest Rates --- EXPLAINED
What is an interest rate?
1) By definition: An interest rate is a formula used to calculate the profit for money borrowed. It is typically expressed as a percentage.
2) In practice: Interest rates are used as a form of advertising by a lender for generating business.
#1 is pretty easy to understand, so....
Let's focus on #2:
Banks and mortgage companies are in the business of creating home loans.
They generate personal and commercial profits by doing so. Their "product" is money...and their profit is generated by lending it. The best way for them to attract a consumer is to advertise the rate that will be paid once the loan is made. Sounds pretty cut and dry, doesn't it? But...it's not.
It is one of the most misunderstood and abused aspects of the mortgage industry. Until we recognize it for what it is....know when something is "the real deal"...and stop buying into the "bait and switch".
We must understand that not one interest rate fits all buyers or home purchase.
We must learn that under no circumstance will a bank or a mortgage company offer an interest rate well below "the street" out of the goodness of their heart.
These lenders will regain their profit in another part of the transaction....and that could be by overcharging closing costs, failing to disclose origination fees or by selling the consumer other bank related services (checking accounts, insurance, credit cards, etc.)
Yet...not advertise that these are the terms of the rate they offer or accept application for. These things do happen everyday!!!