Mortgage Shopping

October 24th, 2009

Grocery Shopping Supermarket

Whether a consumer is calling a bank, a mortgage banker or a mortgage broker; all mortgage providers fund their mortgages through the same sources. Because of this, mortgage rates are very close from one lender to another. Mortgage shopping is hard, however.

The purpose of “advertised” rates is to get the phone to ring. I am sure no one is surprised to find out that the ad for the cheap Mercedes is not real, and that if you want all the options, powerful engine, wheels and goodies you see on the picture in the ad, the cost goes up quite a bit.

Should you be skeptical?

But for some reason, consumers do not use the same skepticism when mortgage shopping. Somehow they believe they can get a 4.5% 30 Year Fixed Rate while the rest of the marketplace seems to be at 5% without paying anything extra or suffering from poor service. Mortgage consumers seem to want the rock bottom rate, the best service, and they want it all ASAP! I believe that the majority of the mortgage horror stories we hear about are self-inflicted and are due to the consumer “shopping” for the “lowest rate”. But did you get the best deal if your real estate settlement is delayed because the bank is not ready on time, or if the fees went up just prior to closing, or if the rate changed “because your credit score did not fit the minimum requirements”, or if you do not get your calls returned, or if the bank goes out of business prior to closing?

How are mortgages priced?

Mortgages are priced based on a number of variables. An accurate mortgage rate quote has to take into account your specific situation and your individual needs. There are numerous variables I will discuss, that a consumer needs to realize, when pricing a mortgage loan. There is no one-size-fits-all mortgage.

There are differences in mortgage firm business models but the net costs of processing and funding a loan are similar with all lenders. In the real world (as opposed to the world of interest rates that exists online) rates should be close to the same from one company to the next. It is pretty exceptional for a lender to be much more than 1/8% or ¼ of a discount point better than other lenders.

Is sales involved?

So how do the lenders in the newspaper or online offer rates that are below the current market rates? Some of it comes to twisting the facts, and some of it is good old fashioned SALES. Do not ever forget that when you talk to someone in the mortgage business you are talking to a SALESPERSON, not some high finance professional who is heavily regulated with a PhD and 100% integrity.

If a mortgage lender is relying on advertising to bring in prospects, they needs to have a reason for a potential buyer to call or click on their ad instead of any of the other sources to get a loan. Because mortgage ads all focus on rate, the one with the lowest posted rate will get the most phone calls. Hence the spin job known as mortgage advertising.

Things to consider when shopping

I’ll try and explain in a nutshell why you can’t scour the internet and expect mainstream lenders to match any rate quote you find. The list of reasons is long:

1). Most loans have so many variables, you can’t just view a rate quote online and be sure it applies to you. Rates are priced differently according to loan size, property type, credit score, occupancy type (primary residence versus investment property), how many days the rate is locked-in for (30, 45 and 60 days are common), purchase loan versus refinance loan versus cash out refinance loan, and more.

2). You have to know if the lender you are looking at is an internet lender, mortgage broker, mortgage banker, or bank. And you need to know how well staffed they are (or are not) and if they will have issue with closing the loan on time. Many mortgage providers are working with bare bones staff which will be certain to cause delay.

3). Does the loan have any prepayment penalty? Many banks will offer a lower rate, but have a prepayment penalty that they do not make clear.

4). Does the loan have any origination fee or discount points?

5). Are the quotes you are seeing current, to the day? Sometimes you even need to make sure the quote you are seeing is current to the minute. Interest rates can change daily, and usually do. Sometimes rates change 2 or 3 times daily. You cannot take the rate quote you got in line at your bank branch last week, then shop online today and find the lowest online quote, and then two days later expect the mortgage broker that your Realtor referred you to match all those quotes. Rates may have gone up, and the mortgage broker’s quote will “appear” high.

6). Did the ad give you APR rates (for a full explanation of APR see this blog: Many times lenders will quote you low “rates”, but then have high APR’s, which indicates that they have higher than normal closing costs, and likely made up the low rate by charging extra fees. Most consumers are so focused on the interest rate, as if it were going to save them tens of thousands of dollars, that they take their eye off of the ball on other important details. In this case, a lender can lowball the rate by a 0.25% or so, and it seems like the best rate in town, but if they charge you an extra $500 to $1000 in fees they have easily made up the little bit of interest rate savings they have allegedly “given” you.

Final questions to ask

There is more, but its difficult to go over all the issues important to a mortgage
transaction, and all the games that a mortgage salesperson can play to quote what appears to be a lower rate. I would certainly ask for the best rate a mortgage provider can supply, but then also ask about the below, and get everything in writing:

-who will be working on your loan?
-can I directly contact everyone who works on my loan?
-number of years of experience each person working on my loan has
-turn around time for loan processing
-turn around time for underwriting
-turn around time for closing document preparation
-if any variable will change your rate quote down the line (your credit score, the state your property is in, down payment, or anything discussed in this blog post)

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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