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15 Comments on Interest Rate DOES Matter
Good points, Ken. I don't know if it was mentioned in the other posts you referred to, but mortgage lenders may or may not be regulated by the state where buyers are shopping for a home. Colorado is one of two states (the other is Alaska) where mortgage brokers aren't regulated. As of January 1st they'll all be required to be licensed with criminal background checks by the Colorado Bureau of Investigation and the FBI. But that only keeps the crooks out. It doesn't set any kind of standard for ethical behavior or regulate what mortgage brokers can or can't do. That's why I tell all my buyers that whomever they choose should have valid, solid references from somebody they trust.
To quote one of my heroes, Hank Hill, "I tell you what" we've got some smokin' smart lenders in this network! Where were you people 7 years ago when I was buying a home (pre-real estate career)?
Yall are the APPLE of my eye!
Ken,
No one would likely advocate for a rate that is 0.5% higher for "good advice", but there is a reasonable price to pay for quality service. My clients pay at least 0.125% higher rate to work with me than the "cheapest of the cheap"
My clients all know, and happily accept a slightly higher price for better, lifelong service. We all have clients who have been with us for years. In my 8+ years in the business, I have many repeat clients who don't shop at all anymore, and don't feel they need to.
When I go for surgery, I don't shop the doctor based on price. I mean, the surgery only lasts an hour or two...but even still.
I'm more likely to shop at Nordstrom's for the experience than KMart for the price. But that's just me.
Bob, after reading your comment I am convinced you totally missed the point. Of course no one would "advocate" for a .50% higher rate. If a customer calls a subprime lender and they get great advice and service and an 8.5% rate, then so what? My point is that Scott's post made me feel like the customer should be happy just to be working with a "great" lender who listened and made the process a joy.
Now what Scott was saying is that there's more to choosing a lender than just interest rate and I agree. For that matter, I agree with you that premium service should warrant premium pricing. The experience of shopping at Neiman Marcus is sometimes worth the extra price.
If your clients are paying .125% to work with you then so be it. Congratulations on building a quality mortgage business. The rally cry for me is to tell the consumer to SHOP for a mortgage not simply take the first lender that gives you a warm and fuzzy.
Ken
Ken,
Thanks for your clarification. In truth, I look at most all loans through my "A paper" eyes, which constitutes 95% of my business. In that arena, as I'm sure you know, the pricing is very competitive. I realize that the margins are bigger in the sub-prime side, as are the opportunities to take advantage of a borrowers trust.
I agree that people should shop around. In fact, I have 2 emails I send to them to teach them how to do it! When the competition is fair, the best people usually come out on top anyway.
Have a great weekend.
Bob,
You and I are singing from the same sheet music. I love your last statement "when the competition is fair, the best people usually come out on top". That's GREAT!!!
Ken
Ken,
You make some good points and I will have to go over to Scott's blog as well to see what he has to say.
I would state that whether or not the rate is important or not depends on the borrower. I have had borrowers pay .5% higher and go with me. It is not because I was more expensive in my fees, but rather after discussing their situation, they realized they would likely refinance in 1 year and the laon they were looking at had a 3 year hard prepay. By raising the rate by .5%, we eliminated the prepay and as soon as we get their credit improved, we can refi them into a much better loan. That is just one example.
The truth is that people need to look for the best value. Most mortgage professionals do not have the real knowledge to understand what is best for their clients. That means that if someone wants to find a professional with the knowledge and experience, they will have to pay more, albeit only a little bit more and certainly not .5% to cover the extra fees.
Another thing to point out is that comparison shopping is flawed. Pricing changes, sometimes many times, each day and what someone quotes you right now may be different when you call that same person back in 10 minutes. Just look at today for example. If you watched the MBSs you would have seen them start off great due to the low cpi (especially core cpi), but that run didn't last very long and they started to sell off. That caused a reprice around just before lunch (East Coast). This happens quite a bit, so it eliminates the comparison shopping from being apples to apples most of the time.
Ken,
Your argument that it doesn't matter what advise they get is flawed. It does matter what program they eventually get sold. Too often banks, credit unions and internet lead companies sell LOW RATE, LOW RATE, LOW RATE, NO FEE, LOW FEE, make your broker suffer, knock him down to the last nickle. Guess what Ken, you get that service. There is no incentive to give the client the best program that reflects his real needs at that moment. Often the client doesn't even understand the direction they are heading anyway, let alone what ramifications he'll be facing if he just goes with what he thinks is the best deal.
Case and point. Borrower goes to Broker A, and broker A is advertising today's loan program of choice among the hundreds of other competitors in their marketplace. At this moment of time it's OPTION ARMS. Their client is a 65 year grandma who thinks she's getting the snizzle, when she's being sold down the river, because the loan officer is getting paid peanuts to sell the loan, and he knows that he needs to close 50 more that month. Grandma doesn't realize that she'll just refinance again from Broker B, who's going to really help ole Grandma and get her the best loan for her circumstance. Why can Broker B do this, because he's working on the principal of making Grandma a client for life, not just for a transaction. Maybe Grandma isn't a internet wonk who can spend hours learning every loan program known to mankind.
I hope my response doesn't come across to strongly, but frankly your being short sighted when you attempt to paint mortgage brokers that apply value in the process as greedy or being over paid. Bottom line is that people will often pay allot for good service, and who are you or anyone else to judge what that bottom line is or is not?
To Robert Ashby,
Your second paragraph about value is very important. I also agree. Good information, accurate information is essential for determining the best loan program for a specific situation and a specific client. All I am saying is that if mortgage loan officer X gives them good information, advice and knowledge should NOT THEN MEAN THE CUSTOMER SHOULD FEEL BEHOLDEN TO TAKE WHATEVER RATE AND FEES THAT LOAN OFFICER GIVES THEM.
Using your first example kind of proves my point that if a consumer gets great advice and you are priced comparably to the market you will win the business. But if for some reason, ANY reason your best interest rate for that customer is 7% and mine is 5% why shouldn't the customer take the 5%? More importantly, this post was to point out that comparitive shopping shouldn't end because a customer finds great advice. I'm not saying to OVER focus on rate and fees, but was responding to Scott's blog which implied UNDER focusing on rates and fees.
As to your comment about daily rate changes I have to respectfully disagree that it is flawed because some days rates change within the day. There have been 7 times since 10/20/06 that has happened. So while I appreciate the implication, it's still a better method than anything else.
Ken
Karl,
I think you "knee-jerked" there a little bit. No where in my blog post did I say it doesn't matter what advice someone gets(I re-read it so tell me where you see it). I'm not sure where you got that impression. I actually agree with everything else you say. Please re-read the article and make sure you see where I'm coming from was that good advice isn't EVERYTHING. I DID NOT say it was of NO value.
Your last statement "Bottom line is that people will often pay allot for good service, and who are you or anyone else to judge what that bottom line is or is not?" is also misguided. People should be encouraged to comparison shop. That includes service. However, the CLIENT is who can judge what the bottom line is, but not if they were convinced to NOT shop around.
Ken,
Fair enough..I re-read your post. I'm still not convinced that simply shopping around is purely a safe alternative for some borrowers. The main problem for some consumers are they are often do not understand which loan programs are available and what cost's or benifits they maybe losing or gaining when they sign the dotted line. I'm not sure the guy at E-LOANS will take the extra 30 minutes to educate the client. I use that company as an example only because I've helped several of their ex-clients into better loans.
So if the consumers decision simply comes down to a "rule of thumb", or this guy's rate is better online then the broker down the street, then the question beg's to be asked. How long is this consumer staying in the home? If it's a purchase, does it make more sense putting down 20% or keeping their money in another investment? How long is the 30 year loan interest only, and does it really matter ? Granted a number of individuals that shop online or on the phone are more then qualified to make their own decisions, I'm not arguing that someone shouldn't be able to shop around.
What I'm suggesting that the average consumer, real estate agent, financial planner, or other expert unrelated to the mortgage industry really does not always know what is really available to them or their cients. It's like me suggesting because I read about how to conduct some medical procedure online that now I'm an expert and can perform the procedure on my own. Or like Robert Ashby, I've flown the Microsoft Air Simulator a thousand times, now I'm more then qualified to fly a jet!
Anyway, sorry Ken like I said for coming across to strongly in my previous comment, just venting some what because value or cost can never be dictated when it comes to service and advice. If I want to pay $10,000 dollars a day to learn how to fly, but you want to pay $50.00 bucks for a flight manuel, that's your choice, not mine.
Finally, not to beat a dead horse, but recently I had this type of situation myself with a new client. The client's wife was a appraiser, and they were purchasing a $65,000 dollar home. Their closing cost's (including escrows and title) were slighty higher then 4.5% of the purchase price. The problem was that they also wanted the best rate available. Bottom line, they can go to the bank, which they tried and were denied, or they come to me. The wife suggested that I charged more then 3% of the purchase price and that was to high. I suggested to her that if she was buying a $500k home then with her logic I could charge $15k and she should be just fine. She quickly changed her tune, and they are happy as can be with our service and candor. The problem in the mortgage industry is that you have allot of desperate loan officers willing to "honey trap" potential borrowers with promises of LOW fee's and rates. But bottom line they usually don't follow through and these bad apples continue to pollute the water for the rest of us just trying to do a good job.
Karl,
I love this discourse. I think it's great! Again, I agree with the vast majority of your points and I want to make sure you realize that! I got a chuckle out of your example on the cost of flying manuals. I'll restate it to make my point.
We both agree that going to a flight instructor to learn how to fly a plane only to realize later on we really needed to learn to fly a helicopter is a problem. The educator failed to investigate our needs or even help us realize what those needs are. Both of us believe a "GOOD" investigation and needs analysis is valuable. If you pay $10,000 to take the course there and I decide to shop around and find out that the AVERAGE cost for this course is $7,000 then frankly, I think you got duped.
Remember, that I wrote this in response to another blog which to me seemed to indicate that cost did NOT matter and only finding a good loan officer DID matter. Perhaps my blog titled too far the other way.
I recently had a situation as well (as long as we are sharing). My best Realtor called me a few weeks ago to say she had a new buyer she wanted me to talk to. The problem was this buyer said she already has a broker she worked with 3 years ago when she did a home equity loan. She was adamant about using the same broker and not talking to any other lenders. Hey! That's the way it goes sometimes, right?
Fast-forward to last week when the day before closing she got the HUD-1 and learned that the interest rate was 10.4% and the origination fee was 3.0% for her loan. She called her Realtor frantic and upset and asked the agent if these fees were "customary". ($500 processing, $495 application). The Realtor explained that those don't appear to be "average" charges but appeared higher and she then called me to confirm. When it was all said and done, the client had never received a Good Faith Estimate, had no idea what to expect the closing costs to be, etc. Perhaps she worked with someone who made her feel comfortable but by not shopping around she wasn't able to get an idea of what average costs for her situation may be.
Bad apples exist. You pointed that out at the end of your last comment. But what BETTER way to minimize their poison then to encourage customers to shop multiple lenders? If you have one quote for BMW at 40k you may think that sounds good. If you get another quote and it is $30k for the same car then hmmmmm... this is a problem. Either 40k is over-priced and that guy is ripping you off or 30k is under-priced and that guy is lying to get your business. What to do? Get 3 more quotes....32k, 34k, 33k....I think it is safe to say the 40k guy was gouging you. What would I suggest? If you liked his service and respected the time and effort he put into working with you...take him the other estimates and ask him to explain/defend his $40k price! He either can defend it to your satisfaction, lower his price to compete, explain why his quote was DIFFERENT, etc.
My problem is with loan officers who say "I'm honest....so my client shouldn't shop around".
Ken,
I can't argue with you in regards to being treated fairly. I'm not sure shopping for a finite item is the same as a service. But why split hairs. It has been fun beating this proverbial dead horse in the ground. I do feel for your client, there is something fishy going on with her mortgage lender if she never recieved a good faith. I've only been shopped a couple times, I guess it's the way you approach the borrower and how confident your are in the presentation. I have a partner who is shopped almost everytime he originates a loan. I think it's because he's always bringing up rate right off the bat, where I deal with the intangible issues first, then drift to rate and fee's once I feel that there is a bond. Personally if they don't want to take time forming a bond, then I'm polite, but suggest they use another lender.