August 30, 2018

Over the years, the topic that has attracted the largest number of readers on my site is shopping for a mortgage. I just counted 70 articles on the subject, going back to the year 2000. There are many articles because shopping is a multi-stage process, with complexities and challenges arising at each stage. The multi-lender shopping facility on my site is designed to guide shoppers through the entire process.

This article describes a quicker and simpler approach to mortgage shopping that was recently implemented -- the Quick Mortgage Shopper or QMS. It has emerged late in the development of my approach to mortgage shopping because one must know all the hazards of the main road before finding a safe short cut.

Though not for everyone, those who can use QMS will shop as effectively as those who go through the longer process, and spend much less time doing it.

Simplifying Assumptions

QMS skips 3 steps in the shopping process:

• Determining whether the shopper qualifies – QMS assumes that she does.

• Determining the preferred type of mortgage – the user must know the type of mortgage she wants beforehand. QMS requires the shopper to select a 30 or 15-year FRM, or a 5/1, 7/1 or 10/1 ARM.

• Determining the preferred combination of interest rate and lender points – QMS assumes the borrower wants the lowest interest rate at zero points and other fees. The borrower who wants to buy down the interest rate by paying points, and the borrower who needs a rebate from the lender to meet cash needs, should not use QMS.  Another name for QMS is “Rate Shopper”.

Adjusting the Rate For Transaction Features

The core feature of QMS is the calculation of a competitive rate that is unique to the shopper based on the features of the shopper’s transaction that affect the rate. These features are the loan purpose, purchase price or property value, down payment, loan amount, property zip code, FICO score, type of property, type of occupancy, lock period, and escrow waiver.

The shopper’s information is used to derive a no-fee interest rate from each of the lenders who deliver prices to my web site, and the lowest of those rates is reported to the shopper. The shopping rate is thus a competitive rate that the shopper can use to shop anywhere – but not anytime.

Since rates are reset every morning, shoppers who use the QMS to shop should refresh it every day, even after selecting a lender, until the lender selected locks the loan rate.

Comparison to the CFPB Shopping Guide

To my knowledge, the only other mortgage-shopping guide is the “Explore Interest Rates” tool provided by the Consumer Financial Protection Bureau (CFPB). Instead of a shopping rate that a competing lender should match or better, CFPB shows a distribution of rates, and leaves it to the shopper to decide which rate in the distribution is the lowest they can expect to find by shopping.

For example, given the loan features I entered on August 21, CFPB told me that in Pennsylvania where I live, rates ranged from 4.5% to 5.75% with a clustering at 4.875%. Since there is no way to determine the reasons for the differences, this is not much help. Furthermore, where the rates posted on my site are updated daily, in line with market practice, the CFPB rates are updated on Wednesdays and Fridays only.

In sum, the CFPB rates might be useful to a visitor from Mars interested in knowing whether interest rates are closer to 5% than 50%, but for earth-bound shoppers they are useless.