3 Things You Should Know About Loan Estimates

Beware! Not all Loan Estimates are created equal. Here are three things you should know about Loan Estimates, where all the closing costs are itemized.

#1 - The Rate quoted to you on Page 1 is not locked... unless the "Yes" box is checked!

Mortgage rates are determined by mortgage bond prices in the bond market.  When bond prices go up, mortgage pricing improves and mortgage rates go down.  When bond prices go down, mortgage pricing gets worse and mortgage rates go up.  Bond prices are often volatile, just like stock prices.  The chart below illustrates how mortgage pricing got worse two times on a single trading day recently! 

Think about getting a stock quote from Stock Broker A at 9:00 in the morning.  Then, you get another quote on the same stock from Stock Broker B at 3:00 in the afternoon.  If the stock price is different between the two brokers, what does it really mean?  It could simply mean that stock prices have changed throughout the day.  Mortgage rates work in much the same way.  While there are some price differences between lenders, much of the price differences you'll notice are due to market fluctuations.

On the same token, imagine going to a stockbroker who uses yesterday's newspaper to quote you the price of a stock today, right now.  Or, imagine working with a stockbroker who is quoting you a price on Stock A by looking at the price of Stock B.  That's why it's crucial to work with a mortgage lender who understands what drives mortgage rates and one who has access to real-time mortgage bond pricing.  One helpful question to ask your mortgage lender or broker in order to test his/her knowledge of the market is: "What drives mortgage rates higher or lower?"  If the lender/broker answers, "the Fed," or, "the 10-yr Treasury," you know that it's probably time to move on.  

On the other hand, you probably have a winner if the lender/broker shows you a picture of the market and helps you understand the factors that may cause mortgage bond prices to get better or worse in the coming days.  Also, beware of rate lock periods that are too short.  For example, if your rate lock is only good for 30 days, but you end up closing on Day 35, you will likely have to pay for a rate lock extension.  Please reference the article I wrote called, Why Do I Have to Pay for a Rate Lock Extension?

#2 - Beware of Inaccuracies in the "Other Costs" Section on Page 2.

This section outlines things that should really be the same from one lender to the next. Neither you nor the mortgage company has any control over how much the government is charging for transfer taxes and recording fees.  These charges should be the same from one Loan Estimate to the next.  If you find a Loan Estimate that has lower fees than the rest, it's likely that the lender or broker who gave you that Loan Estimate is trying a "bait and switch" tactic by promising artificially low government charges when they know the actual government charges will likely be higher than what they are quoting you.  One variable in this section that may change from one lender to the next is the mortgage insurance premium because that is based on the loan product that you choose.

#3 - Don't let the government do the thinking for you on Page 3.

Bless their hearts.  The government wants to make sure that you make an informed financial decision, so they inserted a section on page 3 of the Loan Estimate with certain metrics they want you to look at. As you look at this section, it may appear that a 15-year mortgage is WAY better for you than a 30-year mortgage because the total interest paid over 5 years with a 15-year mortgage is WAY less than a 30-year mortgage.  Also, your total interest percentage (TIP) would be lower with a 15-year mortgage.

However, this doesn't take into account your real-life cash flow scenario.  For example, what if you were to take the monthly payment difference with a 30-year mortgage and invest it in your college fund for your children, or your retirement account, or your savings account for elder care expenses your family may incur?  Is it better to save money on interest or is it better to have the lowest cost of borrowing over time based on your specific cash flow scenario?  

The government is not your financial advisor (and neither am I).  You should really think for yourself and speak to a financial advisor about the financial planning implications of your mortgage decision.  

As for your mortgage options, I'd be happy to help in any way I can.  Contact me for more information!