Rates that sound too good to be true probably are

Some people are hearing about rates on 5/1 and 7/1 ARMS that are much lower than those offered by the main players in the mortgage market.

The main players—Chase, Wells Fargo, Citibank, and BofA—are currently offering rates on these loans in the range of 6% to 7% depending on whether or not you pay any points. Some secondary mortgage players (Union Bank and IngDirect) are offering rates as low as 5.5%. So how can they make money offering rates that are essentially out of the market?

Easy: They make their money by requiring up-front points and having prepayment penalties. They're betting the rates will drop to even lower interest levels than their current offer. The catch? Their borrowers will not be able to refinance to take advantage of lower rates because of stiff prepayment penalties.