Shopping for a Mortgage

Who doesn’t want something cheaper? But who doesn’t want it faster, better and delivered on time as well? It is life’s constant struggle. We work very hard for our money and want to be judicious in spending it. People want the $5 hamburger for $4. Some people want the $35,000 car for $32,000. We want the $500,000 house for $485,000, and if the same house were priced at $485,000 we’d arbitrarily want it for $470,000. We always want a deal! But are we just creating our own problems? And should we be shopping for the best price or the best value? There is a big difference between price and value when it comes to mortgages.

If someone gives us a discount, don’t you think that discount is coming from somewhere? Maybe it’s coming from reduced service, or from corner cutting, or from inexperienced service providers trying to drum up business. Is that really a discount in the end? We all want the lowest price and the best service. The two do not go together.

The best way to say this is by citing my favorite quote about shopping:

“It is unwise to pay too much, but it is worse to pay too little. When you pay too much, you lose a little money – that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot – it cannot be done. If you deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better.”

This quote is by John Ruskin. He was a Victorian era thinker, artist, scientist, poet, environmentalist, philosopher, and the pre-eminent art critic of his time. He was a smart man.

You cannot just shop price alone

You have to shop experience, team, technology and execution as well. If you are just shopping the bottom dollar you may end up with poor quality and delays. Remember all the things our parents told us when we were young:

There is no free lunch.

You can’t get something for nothing.

There is no free ride.

What are the repercussions?

When you search high and low solely to find the lowest cost you have to build in opportunity cost. In the mortgage world this would mean considering that if you go with the very lowest terms you can find, will your settlement be delayed? Will you pay a penalty to the seller for a delayed closing? Does a low cost, inexperienced lender not approve your financing at all? Do you lose your earnest money deposit if you don’t get your financing approved? What if you don’t get the house that you love? If settlement is delayed will you have to pay penalties to your movers who had previously committed to a certain date that needs to be changed to accommodate the delays of the low cost provider? What if the low cost provider has very few experienced local appraisers in your market and you end up with an errant appraisal? Are the emotions of a delayed process worth anything?

What about complexity?

The amount of knowledge and time it takes to prepare, process and approve a mortgage of even mild complexity can be onerous. It not only depends on what has to be done, but how efficiently the information is provided to the lender, and whether it is complete or missing items, which can require additional time. There are very strict due-diligence and compliance standards, which a lender must follow in order to assure a smooth and successful outcome. If I were to comment on what is involved in getting even a standard mortgage through from start to finish, it would take a book, let alone another blog post. In summary, you should never overpay, but also never think that you won’t pay somehow for a discount. It simply becomes a question of whether or not we are willing to pay the unknown price of getting the discount.

Psychology is another interesting component of shopping for mortgages.

When people first buy a home they can be nervous, over analytical, and stressed. As a result they can spend far too much time trying to shave every dollar off of transaction costs instead of focusing on value versus price. Getting 4% instead of 4.125% on an interest rate seems incredibly important, more than knowing the difference between price and value….but it is only $28 a month on a $400,000 mortgage. And it is these same exact people who when I try to get them to discuss a refinance at some point in the future, I can’t get them to take the time to move ahead to save $200 a month, or even $400 a month in one case I remember, because they are “too busy”! How can one be too busy to save $200 a month on a refinance, but not too busy to save $28 a month when they purchase the home?

Is it easy to shop? Are prices static?

It is also important to know that rates can change daily, so calling one lender on a Monday and another on a Tuesday is not comparing apples to apples. And calling lenders at different times of the day can yield an unfair comparison since rates can change from morning to afternoon. And when calling loan officers you may be dealing with a commission cutter, do you really want to deal with someone whose only way to get business is to cut their price? Or you may be getting a rate quote from someone who is doing a “quote and float”. This means they quote a rate, but do not lock-in that rate, and “float” your lock-in and leave you unlocked. Then they hope the market moves down to the rate they promised you at a later date. There are plenty of games people play in the mortgage business, don’t forget this is a sales process.

Summary

I read an article in the Wall Street Journal that was discussing pricing computer products that summarizes this discussion nicely. It said, “The main difference between Apple and others is that Apple products are for the vast consumer market while Microsoft is for the price-oriented market who knows the price of everything and the value of nothing.” Whether or not you agree, and whether or not you are an Apple fan or a Windows fan, the bottom line is that knowing the price of everything and the value of nothing is a painful way to make your purchasing decisions in life.