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I was inspired to write this blog after reading Scott Gormley's "Going Beyond 'The Rate...'" post from earlier today. Scott's point is that there is much more to selecting a lender than determining the interest rate that lender has to offer. And I agree...up to a point. The problem is that there's a flawed assumption in Scott's closing argument.
"Working with a mortgage professional that understands this concept and works towards understanding your needs will make the entire loan process much more enjoyable."
The flaw is that while the process may be more enjoyable, the process only lasts a few weeks and the loan lasts several years. Would you be willing to pay .50% in a higher interest rate for an "enjoyable process"? I mean, what's that really worth?
Another problem is that the ability to diagnose the best loan program for any given situation is not exclusively the ownership of any one mortgage lender. Mortgage brokers aren't better at it then mortgage bankers, prime lenders aren't better at it than sub-prime lenders. Some people are better at what they do than others. I'm all for people getting good advice, but if they get great advice from a loan officer who then "sells" them a higher cost loan then the client could have had elsewhere....how is that good for the client?
WOOHOOO! we got the RIGHT LOAN PROGRAM at 9.00% AND 3 POINTS!!
In Scott's defense, he raises a good point about the qualifications and criterion many people FAIL to use when shopping for a mortgage lender. They do tend to focus exclusively on interest rates. I'm of the opinion that total cost for a loan is MORE important than just the interest rate.
Here is what people need to know about "loan shopping":
People need to understand that different lenders have access to different loan programs, interest rates and fee structures. And from that starting point, the loan officer in many (not all) cases prices the loan to include profitability for himself and the company. In other words, it is possible for two identical applicants to apply at the same mortgage lender with two different loan officers and get different interest rates/fees. One loan officer is simply charging more to make more.
Identifying the right loan program is not a novel or groundbreaking idea. If you are talking to a loan officer who makes you comfortable in understanding the best choice for you and your situation, GREAT! Now find out what that choice costs. Feel FREELY UNENCUMBERED TO FIND OUT WHAT IT COULD COST ELESWHERE. It's called comparison shopping and people don't do it enough.
Understand that until you pick a lender, loan program, property, etc. you are not "locked" into an interest rate. Furthermore, understand that interest rates change frequently. The challenge is that an interest rate quote on Monday may not be accurately comparable to a quote on Friday from a different lender. So how do you comparison shop?
Ask the lender for closing costs and fees regardless of what the interest rate may change to. An appraisal fee is an appraisal fee. The lender is going to charge the same fees (with one exception) regardless of the rate being 4% or 14%. (the exception is a fee charged to buy DOWN the interest rate...known as discount points)
Compare lender closing costs and fees even if you are getting different interest rates. Just make sure each lender is using the same information with regards to: Loan AMOUNT, Down-payment AMOUNT, Loan PROGRAM, and SALES PRICE. If each lender has the same criterion on those 4 items then you should end up with a good set of fees that are fairly accurate.
Now that you have your fee structures, call each lender on the SAME DAY and ask for an updated INTEREST RATE quote. That will tell you who is better priced.
One last word of advice....
Jeff Belonger mentioned in his comment on Scott's blog that many lenders "bait & switch". What that means is that the process above could still result in having an unethical loan officer tell you what you want to hear with no intention of delivering on his rate quote. An unethical loan officer may even give you a closing cost/fees quote which is intentionally low and/or inaccurate. What to do?????
One answer is to ask the lender if they guarantee their LENDER CHARGED closing costs are "locked-in" when you "lock-in" the interest rate. If not, why?
Some very ethical lenders may not have a guarantee policy (they should) so if they don't then do this. Take the estimates of fees you have received and total up JUST THE ITEMS on lines 800-840. If the lender is giving you estimates on a form that doesn't have line numbers that's your first big red warning sign. A Good Faith Estimate of Settlement costs will have the line item numbers if the lender is obeying the rules. Why only those items? Because the charges on lines 800-840 are charged IN CONJUNCTION WITH GETTING A LOAN. In other words, those are the ones the lender is charging you. Other charges on other lines of the good faith estimate are actually charges by title companies, homeowner's insurance companies, attorneys, etc. Your lender has to estimate them but they ultimately don't control them.
After you total the charges on lines 800-844 for each estimate, average them (add up each total and divide by the number of estimates you have). That's the average cost. Anyone more than $200 above that is too expensive, anyone more than $200 below that is probably not being 100% accurate. Use your gut but DO NOT BE AFRAID TO ASK SOMEONE WHY THEY ARE OR ARE NOT CHARGING WHAT SEEMS CUSTOMARY.
Ken Stampe is a Mortgage Loan Originator, Mortgage Author and Mortgage Loan Officer Instructor living in Dallas, TX. Ken provided his first client a mortgage loan in 1996 and writes about home buying and mortgages to help clients make smart home mortgage loan decisions. Contact by email at Ken@KenStampe.com
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.