You’ve browsed around online, looked at some houses on your smart phone. Zillow ads have been popping up in your news feed and you’re deciding to take the plunge and get serious about buying a new home. Its an exciting time, but now its time to think about the boring stuff like shopping for a mortgage. Here’s some tips that will help you shop for a mortgage like a pro and avoid the pitfalls that can end up costing you an arm a leg or worse your dream of owning that new home!
You’ll no doubt become the victim of re-targeting ads, and the online mortgage offers will seem to come out of the wood work. Once you get some google history of searching for homes it will spill over into what we call targeted ads from dozens of online lenders and real estate websites. Here’s the thing, most of us in the industry call them click bait. Not to say there won’t be any legit offers online but many of them are just what you think click bait means. They are data aggregating machines designed to grab your attention and personal information by offering seemingly enticing terms that probably do not really exist in the market place. Lots of these online data aggregators like the Tree etc. are not actually mortgage lenders at all, they are lead machines and they resell the data to lenders who are willing to pay for it. Sometimes they sell your info to as much as a dozen different lenders or more and not all them may be properly vetted. That means your phone and email will pretty much blow up with telemarketers or worse a Nigerian prince. Trust me the Nigerian prince does not really have $2.5 Million in unclaimed funds to give you if you just cash his check and send him the difference. Click bait sounds good but do you really want to field two dozen or more calls a day? Local lenders keep your data secure, they don’t share it or resell it so unless you love telemarketers the best way to protect your personal and financial information is to not enter it into an online aggregators lead trap.
Mortgage Industry folks like to use industry terms, in part its because they commonly use them, in other parts it may be because its confusing. Yup, bankers sometimes like things to be mysterious or hard to figure out. Remember the old trick with the 3 cups and the shell? Sometimes this can be a shell game but it doesn’t have to be if you know your stuff. Things like Processing, Underwriting fee, doc prep fees, Origination fees, all equate to pretty much one thing. Money out of your pocket and into the lenders. Beyond that there’s this pesky thing called a buy down or a discount fee. Discount fee does not mean you get a an actual discount on your closing costs, it means you are being charged extra money and higher closing costs in exchange for a presumably discounted rate. Before you even look at an interest rate, you should be asking what the fees are. We in the industry sometimes refer to them as upfront costs, they are essentially lender fees. So a good question may be what are your total lender fees and how many of these fees do you charge? Do you charge origination fees? Do I have to pay a processing fee? An Application fee (*Never Ever Pay an Application Fee*) What is your underwriting fee? The more fees, the more red flags it should throw.
Here’s the thing, anyone can quote a lower rate than the previous guy. But the devil really does lie in the details when it comes time to shopping around for a loan. You have to look at the overall cost vs the rate scenario to understand fully what you are getting and being offered. Let’s say you’re shopping for a $200,000.00 mortgage. Let’s compare 2 offers here so we can clearly demonstrate the differences and how you may get snagged.
Offer #1 Offer # 2
Loan Amount: $200,000 Loan Amount: $200,000.00
Rate: 4.5% Rate 4.75
Principal & Interest: $1013.37 Principal $ Interest: $1043.29
As you can see above the monthly difference in the 2 scenarios is exactly $29.92. So about a $30 difference for a difference in rate of a quarter of a point/ percent (*industry peeps refer often refer to percentages as points). Let’s examine the details now:
Offer #1 comes with a 1% origination fee, that’s a total of $2,000 bucks. It also comes with a buy down that will later be disclosed of about .75% or 3/4 of a point that’s another $1,500 bucks out of your pocket. So far your paying $3,500 smackeroos of your hard earned cash to save that $30 bucks. It also has a sneaky processing fee of say $500.00 so you’re now at $4,000 in added fees. Mind you these are all the closing costs they are only the portion that the lender is charging in lender fees, I like to call them junk fees but I digress.
offer #2 comes with zero in origination fee, zero discount fee so no buy down fee but there is an underwriting fee of just $795.00. Compared to Offer #1 it’s cheaper in fees by whopping $3,205.00.
Essentially in order to save that $30 bucks per month you are gonna bring an extra $3,205 in cash to the closing table. Now I’ve heard the argument of “hey $30 bucks over 30 years adds up to a lot of money” yeah well that’s a dumb argument. Let me explain, at $30 per month over 5 years you would save a total of $1,800, which is still $1,405 short of recovering your extra $3,205 cost. So even after 5 years of payments you’re still negative over $1,400 bucks. If you took the same money and invested it into a retirement vehicle with a nominal return of say 4.5% (avg 401k returns have actually been higher) you would be sitting on $4,012. over the same period of time that’s an earnings of about $66 or more than double what you would have saved paying the extra junk fees to get a $30 cheaper payment.
I get it, we are all taught that the most important thing is rate, what’s your rate? What kind of rate did you get? Nobody ever asks what did it cost you? The thing is, always look at the full picture and ask lots of questions. Is the juice worth the squeeze? How much will bragging rights or knowing I got a cheaper rate than uncle Joe really cost you. Maybe uncle Joe who paid an extra 4k in junk fees to save $30 bucks a month and has no retirement wasn’t so smart after all? Get with a local Mortgage Planner who knows and understand finance, asks you about both short and long term goals both with the property you are buying and life goals in general. A good mortgage planner will help you navigate the details and help you keep the devil out of them! You’ll get an added bonus and benefit too, they will know the local vendors, appraisers, surveyors, title companies, and more. You’ll get a real pro who will know how to handle any pitfalls along the way and make sure you get the closing table on time.
For more info on smart Mortgage lending and smart money contact me and I’ll be happy to answer any questions and guide you along the way.
Happy House Hunting,