You're shopping for a mortgage and you contact a lender advertising competitive interest rates. You're told that while the lowest rate is no longer available, you might qualify for a loan at a bit higher interest rate that has a prepayment penalty built in. You decline; but are amazed when the lender calls back in two hours to offer you a competitive interest-rate loan without a prepayment penalty.

What's going on? Is it an illegal form of bait-and-switch or is the lender just being competitive?

While the practice might initially send up red flags to the consumer, the lender was (hopefully) acting in a legal manner. True bait-and-switch is luring a buyer to a certain product without ever having that product or service available, then placing the consumer in a product that's more expensive and/or beneficial to the company. The lender in our example had more of a “let's - see - how - badly - we - want - this - loan - before - becoming - really competitive” attitude. And with rates up-ticking more actively now than in the past five years, responses like this are bound to occur more frequently.

Here's why being a savvy consumer makes all the difference.

Since you know the lender is doing his/her best to maximize profit, you need to become vigilant to minimize YOUR costs --- not just where rates are concerned but in the overall cost of borrowing. This includes discount points, loan fees, private mortgage insurance costs---even the ability to pay your property taxes and insurance separate from your monthly loan payment. (Yes, even though this privilege is typically available when making a 20% or greater down payment on a mortgage, you usually need to ask for it. But why shouldn't you have the benefit and float of your own cash instead of parting with it prematurely to the lender each month?)

A prepayment penalty would also fall in the category of unnecessary costs, especially if you were to refinance in a short period of time.

Another confusing interest rate incident is when a lender gives you a range of rates and discount points. For example, if you're merely discussing mortgage possibilities with a lender over the phone, a specific rate might not be quoted. Why? The lender needs more information before quoting an exact rate. He/she would check your merged credit report (also called a “mortgage credit report”) check your credit score, and run your qualifying ratios (based on the income and debt information you give.)

The bottom line is that lower rates and lesser points generally go to financially stronger buyers. In fact, it's not uncommon for a conscience lender to quote you the highest probable rate and points for the loan you're considering, even up to the time of the Good Faith Estimate. The idea is that although this is merely an estimate of costs, it will probably lean to the grimmest side of what you could end up paying.

In lending (as in life), lenders who try to play the game of “get all the marbles you can” will probably not be in business long enough to count the few marbles they do accumulate! Consumers are wising up where their wallets are concerned. They pick up the phone and/or go online to comparison shop. After all, there are few purchases in life as important and expensive as a mortgage.

Why tip the scales needlessly in favor of the lender?

Published: June 2, 2000

Use of this article without permission is a violation of federal copyright laws.

Julie Garton-Good, DREI “The Frugal HomeOwner™” As a syndicated newspaper columnist, author and international speaker, Julie Garton-Good DREI, C-CREC™, is called “America’s Home Affordability Expert”, addressing more than 25,000 persons annually on topics of real estate industry trends and home affordability. She is the author of five real estate books and is the sole two-time recipient of the international "Real Estate Educator of the Year" award from the Real Estate Educators Association. In 1997, The National Association of Realtors® nominated Julie as one of the fifty most influential people in the real estate industry. She shared the list with only three other women.