Is This Deal Too Good to Be True?

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September 7, 1998

"The refinance deal that I took from a mortgage broker was 1 point below the best deal I could find from a dozen different mortgage brokers and lenders. I did not lock the price because I expect that interest rates will fall further. But the broker seems to be in no hurry to complete the deal. Should I be worried?"

Yes! When a deal offered by a mortgage broker is too good to be true, it isn’t true. Did you ask whether there was an origination fee? Many lenders charge a 1% origination fee on top of points, and this in itself could account for the difference between this deal and the others.

Unless you shopped fees in addition to rate and points, there is a good chance that your mortgage broker intends to play "bait and remember" with you. "Bait and remember" is a game played by loan officers employed by lenders as well as by mortgage brokers. The game involves the mortgage broker or lender "remembering" fees that for some very regrettable reasons had not been mentioned before. Those skilled at this game can "read" a client accurately – that is, determine how much more they can get the client to pay without provoking a backlash.

There is also the possibility that the mortgage broker intends to play "bait and switch" with you. "Bait and switch" is the same game played by appliance merchants and others who advertise a low-ball price but when you arrive at the store they happen to be out of the advertised special and try to interest you in something else. The mortgage broker could have a dozen reasons why the advertised loan doesn’t work, e.g., you can’t qualify for it, the lender has gone out of business, etc.

The mortgage broker who can’t snag you with any of these ploys, will just let you dangle. There is always a possibility that market interest rates will drop, making the original low-ball bid workable.

The fact that you won't refer the mortgage broker to your friends doesn't matter because the broker doesn’t intend to be around long enough for it to matter. Sharpsters who enter the mortgage brokerage business to make a quick score in refinancing, will disappear when the refinance boom fades away. Their aim is to acquire clients as fast as possible, and advertising really low-ball prices is an effective way to do that. If some of the respondents see through the game and drop out, others will not see through it, or will be reluctant to admit that they made a mistake.