Shopping Mortgage Interest Rates

Please see recent comments I made regarding shopping for a mortgage and the new Good Faith Estimate. Further down the page, I have two articles that I wrote in reference to shopping for a mortgage.

Guess which one I am

Following up on comments about the new Good Faith Estimate I am seeing that it is being used as little as possible. Loan originators are not required to issue it unless the customer has provided all of the elements of a loan application. In many cases if a customer is "shopping" they will not provide their social security number or if they are purchasing they will not know the property address yet.

In these cases the loan officer will provide an "initial application disclosure" which is an exact replica of the previous version of the Good Faith Estimate with a new name. This document is not binding in the same ways as the new Good Faith estimate with regards to tolerance levels of the numbers provided. In some ways, it is better than the new Good Faith estimate because it provides a clear estimate of cash to close which the new version of the form does not.

Also, in all fairness to the loan officer, we really should not be issuing a Good Faith Estimate in a case where the property address is not determined. The reason being is that the loan originator is responsible for estimating a proper measure of closing costs for the title agent. If we are wrong, it will come out of our commission check. Getting an accurate estimate involves locating the agent that will be handling the closing and calling them up to discuss fees associated with purchase price and loan amount. In some areas of the country such as Broward county and Palm Beach county Florida, the closing agent handles closing costs completely differently based on county the property is in. One mile over the county line can result in a completely different estimate. Also, depending on how the contract is written will determine who is responsible for what costs.

Another reason for not issuing the new Good Faith Estimate that is the more obvious, is that many "shoppers" do not wish for us to pull credit until they have a comfort level with the numbers we are quoting. (Which is understandable) Since every loan program today has very sensitive risk based pricing based on credit score it is really unfair for the loan officer to be expected to quote a rate and guarantee that rate for 10 days if we have no measure of what the true credit report looks like. The new form was partially designed to cut down on "shoppers" but so far that is not the case because the initial application disclosure is still being used in exactly the same way as the previous good faith estimate was.

A good loan officer should be able to provide an estimate that comes within $200 of the final closing costs. As I tell my customers, it is always better to be overly conservative with the Good Faith Estimate and over estimate costs and escrows so that the final numbers come in much less than disclosed.

Here are two articles that I wrote that I thought were worth mentioning again. So many mortgage professionals provide a very lame Good Faith Estimate. Partly because they don't know any better and partly because they don't want to disclose all the costs in an attempt to make their bottom line look better

Shopping for the Lowest Mortgage Rate and Understanding APR

Here is a tip for homeowners and potential homebuyers when you are out shopping for the lowest mortgage rate. Always get a Good Faith Estimate and go one step further and get a copy of the Truth in Lending form also known as the TIL. On the Good Faith Estimate quite often a second rate lender will omit fees due to selective memory or they just don’t know any better. This creates the illusion of a lower estimate and lower cash to close. If a potential client is shopping me, I always say “please send me the other guys estimate and I will circle all of the numbers that are missing.” Missing escrows or closing fees will make a big difference to the bottom line and a bad surprise at closing. If anything it is smart to be over conservative on the good faith estimate and over estimate with no surprises at closing.

Here is another tool when shopping for the lowest mortgage rate. Get a copy of the APR on the Truth in Lending form. (TIL) Annual Percentage Rate or (APR) will give you a measure of the hard costs or closing costs associated with the loan. A good loan will have an APR which is very close to the note rate. In other words, if the note you are signing is at 4.875% the APR should be about 5.034%. The note rate will determine what your principle and interest payment will be but the APR will give you a measure of pre-paid finance charges such as origination points, application fees and the closing fee. The note rate and the APR will never will be identical unless your bank is paying all of your closing costs for you. Sometimes I laugh when I see a second rate lender advertising on the internet with an impossible interest rate of 4.375% on a 30 year fixed but the APR is 5.27 % or so. That means that customer is paying at least 5 points (or percent) to get that rate. Do you think that was pointed out in the first loan officer- customer discussion?

When shopping for the lowest mortgage rate, make sure your loan officer is addressing every conceivable cost. Some second rate lenders will pass off their shoddy Good Faith Estimate by saying “Well that is their fee; I have no control over their fees.” A good loan officer will call the title company on the customer’s behalf and get a quote of the title company fees and make sure the numbers are accurate. A good loan officer will read the purchase contract to see if the closing costs are being handled differently for any reason. Like any other service, when shopping for the lowest mortgage rate, make sure you look at the big picture and don’t forget to include expertise, honesty and service in the equation along with price.

Shopping for the Lowest Mortgage Rate: Study the Good Faith Estimate

It never stops to amaze me what some lenders pass for a good faith estimate. Typically when a customer starts shopping for his or her mortgage lender they will start by calling around to find the lowest mortgage rate. This is a cumbersome process and usually the customer will end up with some lender mentioned by some person to be honorable and trustworthy. It is kind of like finding a car mechanic; you want to hear from somebody that he or she is a “good guy and they will treat you right”.

The other day I took my car to the dealer for an oil change and they told me I needed brakes $180 (which I knew), a new computer $600, new gasket seals $500 on the engine and suggested a couple other items that I could conquer if I was feeling ambitious. So I changed my oil and went home. Two weeks later, I fixed my brakes at another dealer and all of those other problems miraculously disappeared. The same thing can happen when shopping for the lowest interest rate. Buy the things you need and don’t get carried away with the things you don’t need. If an estimate appears to be out of line, it probably is. Beware of an interest rate that is too good to be true and beware of fees that are omitted.

Whenever I am up against other mortgage companies, I tell the customer to fax me the other offer and I will circle all of the line items that are missing. Completely avoiding a fee will make the estimate appear much less regardless of interest rate. Quite often escrows are completely omitted to make the totals appear less. Every purchase requires one full year of insurance paid if you are escrowing or not. On a refinance, a major part of the discussion should be, am I escrowing, is the loan going to cover escrows, am I going to swop escrows that are due back to me from my current loan.

Beware of internet mortgage companies who send a bare bones estimate with an interest rate that is too good to be true. This is done partly because they process so many leads from customers who are surfing and partly because they know that internet prospects will probably collect 10 estimates and they want theirs to stand out. I once worked at a mortgage company for one day that believed in not disclosing the Good Faith Estimate. “Why do that, they are just going to shop you” Or the other response was, “if they want 3.5% tell them they can have it.” (Just don’t tell them it will cost 5 points.)

When shopping for the lowest interest rate, try to remember that it is not always a level playing field. If you are visiting the branch of a large bank, where the loan officer has one rate sheet he will not have very much flexibility. The rate is mandated by some higher up in secondary marketing who has built in the cost of overhead for all of the salaries and buildings of the entire organization. Let’s call him the dealer. The private mortgage guy is your local mechanic down the street, who may be a little less expensive because he has control over his own overhead and is willing to jump a little higher and cut cost a little more to gain a repeat customer for life.

Written by Preston Ware
First South Mortgage
Tel: 704-542-8057
http://www.prestonware.com
Email is preston@prestonware.com.

Here are more tips that will help you lock in a low rate:

Work with a lender who has many options as to where to place your loan. If you go directly to a bank they have one option. Working with a mortgage company allows you to shop your loan with the many sources the broker has at his fingertips. Here at First South Mortgage we can pick and choose from the top ten sources in the country. Also, since we are a full eagle lender, we can close your loan in house which makes the process easier
Work with a lender who is not overly greedy. Some mortgage companies tell their loan officers that they need to make (x) amount of dollars on each loan. In this case, they are not looking out for your best interest. Other banks have sort of a one sided relationship with their loan officers where the house takes 66% of the money. The poor loan officer has no choice but to charge you extra in order to make the same money.
Work with a lender who doesn't have their loans spoon fed to them by a realty company or a builder. Quite often in this type of relationship there is a kick back that takes place which forces the loan officer to charge you a little more to make his normal fee.
Work with a lender that doesn't have too much overhead. You have the best chances of getting a low interest rate if your lender doesn’t have too pay for offices and staff all over the country.
Understand the day to day changes in the market and know how they will effect your loan. Usually a good day in the stock market is a bad for interest rates and vice versa. If you time your lock well that might translate into an eighth better on the interest rate.
Whenever possible, I like to take advantage of a short term lock. Mortgage rates have been relatively flat for the last year.Our lock increments come in 15 day time periods. The shortest lock offers the best terms for the borrower.
Don't waive escrows. This is your option when you have a loan under 80% loan to value but it costs .25% to fee when you do so. If the broker has to absorb this, that may effect your pricing.
Don't be afraid to buy points. If you intend to stay in the home a long while it will make sense. Also in many cases the point is tax deductable. Do a cost/benefit analysis of paying the point or not paying the point.
Believe it or not the state you live in will have an effect on pricing. This could be a little out of your control but it does weigh into the equation.
Credit score, credit score, credit score. The absolute best pricing comes with a middle credit score of 740 or better. As the scores drop, the rate goes up.
Try not to take cash out if you can help it. There are very large adjustments for cash out which are also sensitive to credit score. There is actually a trend in our country where one third of borrowers are doing "cash in" refinances.
Live in the house. There are big adjustments for investment properties and in some cases second homes.
Buy a single family residence. Some lenders don't like condos and especially high rise condos
Prove your income. The days of stating income are pretty much gone but if you want to state income, be prepared to pay some points.
Get your loan closed on time. Respond to requests for information from your loan officer as fast as you can. If your loan gets to the end of the process and you need to extend the lock, somebody has to pay for it.
Don't get carried away with interest only or 40 year mortgages. These types of loans were sort of a fad 5 years ago but now many of the homeowners who took them out wish they didn't. Whenever we do this type of loan there is a hefty rate adjustment that only hurts you in the long run.
Beware of mortgage companies that do 100% of their business on-line. Quite often these types of operations have the attitude of "burning and churning" or that of a hunter rather than a farmer. At First South Mortgage we hope to plant little seeds of happiness with every customer so it comes back to us in the form of referrals. Because we strive to receive your referrals, our goal is to make you so happy with the service that you received, you will be more than happy to refer our name to friends and family as you go on through life.

Whenever a customer approaches me with an estimate that they feel is lower than mine, I usually challenge them to fax me a copy. I then proceed to circle items that are overpriced and circle omissions that make the estimate appear less. With the new Good Faith Estimate rules in use today, the mortgage lender basically guarantees the fees quoted for his company, the bank, the title company and the transfer fees of the state. This new estimate is literally something you can take to the bank!