The interest rate shown on the GFE, even if it was accurate on the day it was given, was obsolete the following day. The same is true of points (items 801 and 802 on the GFE), which are upfront lender charges expressed as a percent of the loan. Because the market is volatile, lenders reset their rates and points every day, and sometimes within the day.

Shoppers can depend on quoted rates and points only when they have a written confirmation from the lender that the terms have been "locked" for a specified period. The GFE is not a lock statement.

A favorite trick is to understate the price (rate and points) on the GFE, and then attribute the higher price on the day the shopper locks to changes in the market. Ordinarily, a shopper has no way to challenge the loan provider's statement about the change in market price.

Fixed-dollar loan charges are supposed to compensate lenders for the costs of originating the loan. They are all in the 800 series and include such items as loan processing and underwriting. These charges are not market sensitive and should be guaranteed by the lender providing the GFE, but they aren't. Under the rules, they remain "estimates" subject to change. This means that an unscrupulous lender can discover that his charges are higher than estimated, and can even discover some new ones that weren't on the GFE.

Third party charges, which include title insurance, other title related charges, appraisal fee, and credit reports, are scattered around the GFE. An unscrupulous loan provider trolling for prospects may deliberately understate these charges. After the shopper is hooked, the figures will be restored to the actual amounts charged by the third parties. Or the charges may end up even higher if the loan provider has a sub-rosa kickback deal with the third party service provider.

The upshot is that the GFE cannot be used effectively to shop other loan providers because the loan provider issuing it is not bound by any of the numbers on it. In many cases, the numbers on the GFE have a tendency to inflate as a loan moves to closing.

At this time, I recommend only two shopping strategies. One is to shop the Web sites of lenders recommended on my site.

These lenders don't lure shoppers by under-pricing because shoppers can check their prices when they lock. The fixed-dollar fees charged by these lenders don't escalate over time because the lenders guarantee them. While only one lender guarantees third party fees, the others provide honest estimates because the numbers are too easy to check to risk taking a chance. Shopping online is for people who like to be in control, are willing to do enough homework to know the mortgage features they want, and have good credit.

Strategy two is to select an Upfront Mortgage Broker (UMB) to shop for you at a fee specified in advance. UMBs are also listed on my site.

UMBs don't under-price loans to lure clients because their deal with the borrower is about the broker's fee, not the loan price. The UMB is committed to finding the best loan price. UMBs pass through fixed-dollar lender fees and third party settlement charges because that is part of their professional obligation to the borrower and they have no financial incentive to do anything different.

The UMB approach is for people who would rather entrust shopping responsibility to a professional, who need guidance on mortgage features or have special problems, or who just want to minimize their investment in time.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.

Copyright 2006 Jack Guttentag