Shopping for interest rates and for mortgages in general is usually characterized as an easy process, even for those with previous experience. The truth is, it can become increasingly difficult when trying to sift through answers from several loan officers. You might find you’re often second-guessing yourself and wondering who’s right and who’s wrong.
What are shoppers searching for? Most want the best mortgage interest rate. They also want excellent customer service along with it. What did our parents tell us in our youth? “You get what you pay for”. Mortgage servicing is not different. It’s important to remember that extensive knowledge, experience, top-notch customer service, education, and being upfront may come with a small price. That price could be a rate of 1/8 percent higher. It could be a difference of around $6 to $23 a month, depending on your loan amount. Question : Should you be rolling the dice for the best rate? Gambling away important facets of the biggest purchase of your life may not be worth the risk/reward. Let’s examine a scenario of rate shopping:
Picking your lender. Let’s assume you are talking to three different loan officers. We’ll label them A, B, and C. A has the best rate by a 1/4 of a percent on a FHA 5/1 adjustable and the lender fees from all three are relatively the same. But B explained in detail on how the adjustable rate worked now and later. B also gave you food for thought on what it might be like when refinancing in the near future. B realized that you were buying a home that was $40,000 under value and took the time to ask about your goals and your future. During the discussion B noted that you made reference to refinancing in less than 5 years. You were saving $154 a month with the adjustable rate and figured in 4 years that you would be at a 80% LTV (loan to value ratio), so you wouldn’t have monthly mortgage insurance.
It also didn’t matter that B asked you which loan program you were planning to use in 4 years when you decided to refinance. You stated, “I am going to use the FHA loan again.” B responded with the fact you would still have monthly mortgage insurance for 5 years, no matter what, even if you had 20 percent equity or more when refinancing on a FHA loan. It becomes apparent to you that A did not take that into consideration and the lack of detail could be considerably more expensive.
The shopping process continues. B calls you up three days later, letting you know that interest rates had gone up by 1/8 of a percent. B is now 3/8’s of a percent higher than A. B asks you if A has gotten a hold of you in the last three days to make you aware of this. You reply, “no”. And there had been a few times when you would try calling or e-mailing A, but it took a few days for them to get back to you.
Decision Time. You decide to go with A because A’s interest rate was a whole 3/8’s of a percent cheaper now and A never told you that rates changed. Even though you were so pleased on how B educated you, shared specific tips with you, and that B was always available for you, you went with A.
Loan Application time. A provides documents to sign. Immediately you notice that the rate has increased 1/8 of a percent. A explains it in a way that sounds plausible. You sign and start the application process by providing your documents along with a $400 appraisal check post dated 3 days (due to new lending laws). Note: A didn’t bring up lock in policies and got you to float.
During the Loan Processing. You try contacting A to follow up with the interest rate and see how the loan process is progressing. At times you would get an e-mail saying that all is fine and rates are good. In some cases this would be 2 to 3 days later. You begin to lament the fact that during shopping process, A was much more accessible.
Fast forward to settlement day. You get to the closing table and find out that you need an extra $500 because your escrows are short. You recall A saying that they always provide worst case scenarios, erring to the high side to avoid surprises. Unfortunately the process ends with the surprise and takes you right back to the second guessing stage. This time it’s too late to realize that B’s exceptional service at 1/8 higher, may have actually saved you money in the long run.
- Itemized fee worksheets (aka the old good faith estimate) Get all cost sheets with interest rates the same day from everyone that you speak to. If you find someone new a few days later, you need to go back and ask them all for updates. Same if one tells you that rates have changed, good or bad. Note: It’s not mandatory that a loan officer give you any type of fee sheet, cost sheet, or GFE (good faith estimate). Don’t say yes to anyone until they can show you all costs and rate spelled out on a piece of paper. Just be aware that it’s often not worth the paper that it’s written on.
- Lock vs Float – Make sure the loan officer explains the different procedures to you upfront. Make sure the loan officer understands your closing/settlement date. If you don’t have one, make sure you ask all the loan officers how long that rate would be good for when shopping. The longer the lock period, the more expensive the interest rate.
- Credit scores – If you won’t allow the loan officer to pull your credit, make sure each one has a copy of your credit report. There is more to it than just your credit score and your total debts.
- Be leery of specific ads or individuals that use such terms as “best interest rates”, “cheapest rates”, “lowest rates than anywhere else”, etc, etc
- Be leery of those that state, “I guarantee”, “I promise”, “no problem”, “I am very honest”, “to be honest with you”, etc, etc. – Not that these are bad phrases all of the time, but if used often in a short period of time, could be a red flag.
Additional Tips : Don’t focus strictly on interest rate. And don’t shop based on the APR, because the APR has it’s own rules, and lenders can manipulate the APR. Just a fact. Mostly shop interest rate and total lender’s fees when just comparing “cost sheet sheets”, “itemized fee worksheets”, “good faith estimates”. And never hesitate to ask a question. It’s not a cliche, there really are no dumb questions. A good loan officer will encourage you at the onset of your relationship to ask questions and be available as much as possible.
Final Note: What happened to C? Well it seems that C was hard to get a hold of and took days to get back with answers to your question. Even though C’s rate was the same as A’s, You weren’t interested.
Flickr Photo Credit: (Pre Edit) grendelkhan