What is the Best Rate?

August 19, 2015

What is the fuss about people looking for the “best rate” when it comes to loans? We learned in school or college, that demand is more when supply is down. So when too many lenders bid for one deal, they compete. They want to give a better rate to bid on a deal. In a great economy, every lender wants to lend; but those days are clearly gone.

When banks have been burnt or have the feds looking at their lending practices under a microscope, it means they can’t use shortcuts to make money. At that time it’s not the rate that counts, it’s whether you stand to even get an approval. During this time, if approved, not when but “if” approved, take the money and run. Nobody gives a “bad rate” to lose a deal.

Here’s when assumption takes over common sense. To add to this, the blame (if there’s a word like that) goes to those sales-oriented bankers who “sell” rates, because they are afraid of losing business. An old school banker or lender does not fear losing business because losing bad business actually could be the best decision made.

On the flip side, our dear consumers grew up learning how to save. Sure, saving is a good thing and great habit, but somewhere, somehow, this habit of saving has got mixed up with being senseless and literally counting nickels and dimes while they still want to drive a prestigious car. Saving seems to be a style or a fad in, interestingly, the more educated. Reality is, this is blindly following and not thinking. Everybody asks for a rate, the best rate.

They all think if they say that, they will undeniably get the best rate. What consumers don’t understand is that, lenders look at whether you have the ability to pay back or make monthly payments without stressing out. To add fuel to the fire, the new generation lenders started playing the game as well from the other end. “Sure, we will give you the best rate”, they say, but with that you have to pay a point, or put a larger down payment or a hefty prepayment penalty. Point I’m trying to make is “best rate” comes with a cost. There is no such thing!

There is a saying “what you see is what you get”. In the lending world, what you don’t see, is what you get. You just don’t know that. Nothing is free in this world. You want a lower rate because that’s what you see; then you’re either paying a price now or refinance after 3-5 years and pay the price then. An educated or “informed” customer says lets calculate the monthly payment and see if we can live with that, forget the rate, that’s just a number, doesn’t really mean too much in the broader spectrum.

If the economy is projected to improve, rates are assumed to increase, therefore let’s fix the rate for the longest term possible now because later the rates will skyrocket. Sure, pay a price for getting a better deal now (as in closing costs). Once I had a client who asked me if I could lower the rate by a point. What the client was thinking was rate. Didn’t think about the actual monthly loan payments. Signing up for a 10 year amortization with a 5 year prepay appeared to be better than my 25 year amortization deal with a 3 year prepayment, why because the rate was staring at him.

The fact was the client was ready to sign up for paying an extra $660,000 in a 5 year lock in rate versus $1500 dollar difference in rate over the same period. In the long run you will always come out a winner if you think. Nobody thinks about the exit strategy. That’s a separate topic to discuss another day.

It is time to think and hedge. Calculate, people! At the end of the day, logic wins, stupidity remains injudicious. So next time you ask for the best rate, thing logic, Nildon’t blindly follow foolishness.