When you're sitting across the desk from a mortgage-loan officer wondering whether you'll get the loan, you should also be wondering if the officer is sizing you up as an opportunity to earn a little extra money - at your expense.
Some lenders allow their loan officers to earn a bonus commission, called an "overage," by padding your interest rate or the amount you pay in points. If you paid just one-fourth of a percentage point higher on a $100,000 fixed-rate mortgage, you'd pay more than $6,000 extra over 30 years.The higher rates are not based on your creditworthiness, says Paul Hancock, chief of housing in the U.S. Justice Department's Civil Rights Division. The practice of permitting overages "is an employee-compensation method," he says.
Borrowers are susceptible to this practice because they often don't realize that a single lender has a whole list of rate-and-points packages. Those packages vary from day to day, so any published rates you see, say, in the newspaper, are likely to be out of date by the time you get to the lender.
To further confuse matters, the difference between a lender's overaged rate and its regular rate may be only a quarter of a percentage point or one loan point paid at closing.
"You're not going to perceive the difference between a regular rate at one lender and an overaged rate at another lender unless they're bumping it way up," says Robert Cook, senior financial-lending spe-cial-ist at the Federal Reserve Board.
Shopping among several lenders will give you a better idea of the real going rate.
Cook suggests you get preapproved by a couple of lenders before you're ready to buy a home, so you have a better bargaining position. If you know you can get the same loan for half a point less down the street, you'll have the negotiating advantage.
Expect to be offered an above-average rate even without any overage if you're an above-average credit risk. You fall into that category if you're self-employed, have made frequent job changes or have some blemishes on your credit record.
If you're looking for a "jumbo" loan - greater than $203,150 (or $207,000 for loans that are sold to the Federal Home Loan Mortgage Corp., or Freddie Mac) you'll find slightly higher rates.