It’s Way Past Time To Crack Down On “Bait Rates”

“I don’t mean to sound sleazy…but tease me… I don’t want it if it’s that easy,” Tupac once rapped.

Whether it’s beautiful hair, a trim body, easy money, a dream career or a great love life, reality often falls short of the teases thrown at us each day. And when we’re thinking straight and not caught up in the fantasy, like Tupac said, we know it’s not that easy. But when the dream is something we really want but don’t know how to get, something we’ve thought about our entire lives that’ll give us or our families the lifestyle we want and deserve – it’s hard to avoid the hype.

Take one of the most dangerous teases today – it involves the largest purchase most of us will ever make in our lives – a home.  

Mortgage marketers pound us every day with ads featuring dancing people and incredibly low interest rates that are actually available only to a small slice of the national population.  These “bait rate” ads work because most people haven’t a clue as to how mortgages are priced, and they discover too late in the game that they’re going to be paying more—sometimes many thousands of dollars more—than they were led to believe.

And while it’s there, most of us don’t read the fine print next to the small asterisk that qualifies as disclosure, fewer borrowers understand what it really says and means.  Basically, it says that the rate we see is most likely not the rate we’ll get. We want to believe we’re getting a good deal and we know we’re smart.  Right?  How hard could it be? 

In reality, the process of taking out a mortgage remains a confusing, frustrating and sometimes stressful event that most people undertake only several times at most in their lifetime.  So, most of us are sitting ducks.

A recent survey by GfK Custom Research for found that nearly one of 10 (9.6%) recent home buyers ended up with a higher interest rate than the one they were promised.  We think many more borrowers experienced the same thing but don’t want to admit they got teased.

The real mortgage rate you end up with is the product of a number of factors.  The most important being the market for mortgage-backed securities, which changes rates daily.  Next, your credit score.  The rates you see advertised are generally based on scores above 720 or 740 out of 800; the national average score is around 692.  A recent analysis of rates and scores for consumers on found that a borrower’s credit could raise their interest rate as much as 40 basis points, or .40 per cent. The real rate you pay also will be influenced by the amount of money you put down, where you live, the size of your loan, the ratio of the size of your loan to the value of the property you are buying, the total monthly cost of debt you are carrying, whether you pay points at closing, when you lock your rate, and the type of loan you select.

Not until your lender processes all this information will you know what your real mortgage rate will be.  Don’t be surprised if it’s two points or higher than the advertised rate that attracted you initially. 

Bait rate lenders count on you being too frustrated, lazy, busy, confused or too far down the road in buying the house of your dreams to shop around for a better deal at the eleventh hour.

 As bad as it is, the interest rate bait-and-switch game played by some mortgage marketers today is less dangerous than the teaser rates lenders use to attract homeowners looking to refinance and home equity lines.  This is because these ‘blue-light specials’ offer artificially lower rates for three to six months, only to recoup the discount over the term of the loan. In the housing bubble days, teaser rates suckered punched people into mortgage loans that eventually reset at much higher rates, a low-level form of the Ponzi scheme that contributed to the subprime crash and record foreclosures.

With the public’s trust in lenders at an all-time low, now is the time to stop playing games with mortgage rates.  Bait rates are confusing, misleading and a major cause of consumer distrust.  Let’s play it straight with rates.  Maybe mortgage marketers will discover that honesty and candor bring more borrowers to them who are a better risk because people are wise enough to know it’s really not that easy. 

Here’s to cracking down on bait rates and putting truth back into Truth-in-Lending at the top of the agenda for the new Consumer Finance Protection Bureau when it swings into action four months from now.