APR and FBI, CIA, USDA, FDIC, ATF, USPS, SEC, NASA, HUD. A lot of terms and abbreviations these days seem like alphabet soup! Interest Rate and APR (Annual Percentage Rate) are two of the most commonly confused terms in the mortgage business.
Blog Category: mortgage shopping
Let’s do a quick lesson that may take us back to our school days. I want to make sure everyone knows what a commodity is and is not.
What is a commodity?
A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market. The market treats a commodity as equivalent or nearly so no matter who produces it. Examples are corn, salt, wheat, petroleum and copper.
One motto I follow in life is: do not be sold, be educated. One of the favorite t-shirts that I have is an old, tattered blue t-shirt that has the words “I Need Advertising To Help Me Decide” written across the front. I love the sarcasm and the not so subtle message. It is discomforting that so many people let themselves get sold, as opposed to taking the time to learn, study, analyze and decide using proper business analytics. I see this in the mortgage world more than you would think.
Each mortgage lender has dozens of loan programs. And there must be hundreds of lenders. We work with 50 lenders or so. And each lender may have a different interpretation or guideline for each category of the loan. These categories would be related to credit, income, appraisal, assets and debt ratios.
Why do I feel like when someone calls me to talk about interest rates, they are calling multiple people, scouring the internet, and getting a lot of misinformation? I have a good friend who works at Freddie Mac (FHLMC) who I met for dinner recently. Over dinner conversation she mentioned that when FHLMC sends out their report on average interest rates. They get calls daily from homebuyers and people interested in refinancing. These people ask how to apply with FHLMC for that rate! My friend says the callers will say, “Can I get that rate from you that you guys reported, I can’t find it anywhere else!” They then have to explain that FHLMC is not a lender. FHLMC is a corporation authorized by Congress to provide a secondary market for residential mortgages.
Everyone wants to get the best deal reasonably possible when getting a mortgage. I say reasonable, because although some lending sources advertise what seem like unreal rates, most consumers are smart enough to discount what appears to be a free lunch. The reality is that even with hundreds of competitors, rates never vary by much more than 1/8% in rate. But hey, who does not want every 1/8% to be in their favor?! I do. So go for it. But here is the problem with shopping for that best 1/8% deal online:
Getting a mortgage is easy, right? You apply for the loan, you send in some paperwork, someone appraises the home, if your credit is OK, a little bit later you get a mortgage. Right? It should be that easy, I agree. We have the technology and desire in place to make the mortgage process easy, I believe. But getting a mortgage has become the most arcane, complicated, minutia filled experience ever. It is worse than going to the Department of Motor Vehicles, by far.
If you type “Mortgage Calculators” into Google you will get over 2 million results and Google’s simple mortgage calculator at the top. The Google mortgage calculator will give you a rough idea of mortgage monthly payments based on a simple calculation of the interest rate and mortgage term. It doesn’t answer any details, like: how many payments do I have to pay in order to pay off my mortgage? In 15 years how much mortgage will I have left to pay if I increase my monthly mortgage payment? What happens if you want to increase or decrease the interest rate, or change the amount of years of your home loan? With all the mortgage loan calculators out there isn’t it best when you can see the big picture of your home loan payment and how it can work for you.
Going dark on your salesperson. All salespeople have experienced this, no matter how good. You educate a potential client, you spend hours and hours with them answering questions, you create a relationship, and you truly seek to help them to earn your commission. And then it happens, they go dark. No contact. No return calls. No email reply. No nothing. It is eerie. You start to wonder what you did wrong.
It is easy to be confused when shopping for a mortgage these days, especially a refinance. Most lenders just throw up as much stuff on the wall as they can to see what sticks. They would take 1000 loan applications in the hopes of closing on 500 of them. But where does that leave the 500 people that had their loans rejected? Is it fair to have them pay $400-$500 in application fees, and to wait 30-90 days, when it could have been determined in advance the loan was not able to be approved.
Key Findings for Real Estate Agents: There was an extensive report done by a research, marketing and communications firm based in Washington, DC. The firm has more than 30 years in the field of research with deep experience in the fields of financial services, housing and technology. I want to show you the results of some of this research as it relates to the mortgage industry. It will help Realtors and mortgage consumers better pick a mortgage lender.
What were the key findings for real estate agents?
One motto of Lending Tree is, “when lenders compete, you win.” Yes, I agree. But that should be expanded to be considered even somewhat accurate. If Lending Tree were my company I’d say, “when experienced, legitimate, local lenders compete, you win.” But then , I’d have just put myself out of business. So I guess I would not say that if I owned Lending Tree or some other “lead generation” website.
I have had clients who always think, “Let’s get a better deal at all costs”. I had clients who applied for a refinance almost 4 months ago. Interest rates dropped for quite a bit of that time period. It seemed like once a month they were asking me for a better deal than I had originally locked them in at. Getting a better deal is fine. Steamrolling everybody in your path to pick up each 1/8% rate drop is another.
Yes, there really is a loan officer in the doughnut at times. What I am talking about is how business referrals are sourced in the mortgage industry. I’m afraid business is still referred the old-fashioned way. Not by who earns it, but by who brings the freshest doughnuts to the Realtor office meeting. Or who picks up the tab at happy hour, or buys your Realtor tickets to the hockey game. And also, who hangs around the most in the realtor offices. Does this sound like a professional way to analyze a business vendor?
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.
Is there a free lunch, or isn’t there? My last post about mortgage shopping suggested that interest rates are only a slight bit different (1/8%) from lender to lender, and that the consumer needs to focus on performance, customer service and execution more than price. But no one does, do they? And we create our own customer service problems by seeking the lowest price, and expecting the best service. It happens with mortgages, movers, furniture, contractors…you name it. We have been creating our own service and product hassles since the dawn of time.
Is paying points on a loan a good idea? When you buy a new home or refinance, it can be a nervous and exciting time. And getting excited and nervous causes people to over analyze and sometimes make poor decisions. Sometimes a client will ask for a lower rate by paying discount points. Each discount point is 1% of the loan amount. This is $1,000 per $100,000 in mortgage. It sounds great to get a rate that is a half percent lower than what you hear about in the news or see online (shopping for rates online is not accurate, see this story for more on that), but what about the costs?
Interest rates are up, not a substantial amount, but enough to remind everyone that interest rates can go up as well as down. Rates are up about .25% to .375%, depending on the loan product and some other variables. I find that insignificant. But a homeowner who wanted to refinance to a Conforming 15 Year Fixed Rate at 3.125% who is now being quoted 3.5% is astonished. First, most of us forgot that rates can go up. We thought they only had one trajectory….down. Second, when the 15 Year Fixed Rate was at 3.125%, the client was hoping for 2.875%! And if rates got to 2.875%, people would hope for a little more. The financial psyche of we humans is fascinating. The deals we get are never good enough! We always want more.
Let’s go mortgage shopping! 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 mortgage shopping.
It may seem odd that someone in the mortgage business wants to discuss how to help consumers find the best mortgage lenders. People search for mortgage providers every day without the benefit of professional help. So, I figured why not help people whether they find their way to me or someone else? Below I’ve listed the most important mortgage questions that you need to ask before you apply for a mortgage loan.
Often times a Realtor will suggest to a homebuyer that they use the real estate company’s “in-house” lender. Realtors don’t usually push these lenders on their buyers, but they are definitely suggested many times. Every wonder why? It is important to know how these lenders are structured, and how they operate.
It never ceases to amaze me how people treat the most expensive transaction that they will ever do in life as a commodity. Would you get surgery at McDonald’s if they got into the health care business because it was the cheapest place to get it? Or would you talk to numerous different doctors based on experience, referrals, track record, and interaction with their staff and systems?
I lost a client recently, mostly because she was a price shopper, and would not answer my questions. And then I heard from her again mostly because she was a price shopper, and would not answer my questions! Confused? I was too. It has to do with currencies, underwriting rules, foreign countries and more. Sounds mysterious. I’ll explain.