Mortgage Shopping Tips For Borrowers In a Hurry
This article suggests some shopping techniques for borrowers in a hurry. A longer and more complete statement will be found in How to Shop For a Mortgage.
Prices shown in printed media are obsolete when they are published. Price quotes offered over the telephone are worthless. But lenders generally are prepared to deliver the prices they post online. Upfront Mortgage Lenders show complete prices on their sites.
Better yet, use the professor's new Certified Lender Network, which has multiple lenders delivering prices on a single system, with built-in protections and decision support. For a more complete discussion, see Finding a Mortgage on the Professor's Certified Lender Network (CLN)
Shop On Friday
Because the market is highly volatile, valid price comparisons have to be made on the same day. You don’t shop lender A on Monday and lender B on Tuesday because prices are reset every morning.
My favorite day to shop is Friday because the prices lenders post on Friday hold until Monday, which gives me more time if I need it. If you shop any other weekday, you have to finish it all before prices are reset the following day.
Decide the Instrument You Want
I have tutorials to help you make these decisions, see Tutorials in Selecting Mortgage Features, which are affected not only by your personal preferences, but also by the market prices of the different instruments. When I revised this article on January 17, 2011, for example, conforming adjustable rate mortgages (ARMs) were priced very favorably relative to fixed-rate mortgages (FRMs). Once you know the type of instrument you want, you are ready to compare the prices of different lenders for that instrument.
The Certified Lender Network provides all the information you need to select the type of mortgage you want before shopping for the best price.
Compare Costs at the Same Interest Rate
Lenders usually post interest rates in even multiples of .125%, which makes it easy to find a common rate offered by different lenders. The question then is, which lender has the lowest cost for that rate? This is a little tricky because of the different kinds of data that lenders provide.
Comparing Costs on FRMs
If 2 lenders offer, say, 5.5% on a 30-year FRM, the better deal is the one with the lower total lender fees. Lender fees consist of charges expressed as a percent of the loan, usually called “points”, plus charges expressed in dollars. Dollar charges are usually broken down by category, but the total is the only number relevant to the borrower.
Some lenders will show total lender fees, which makes it easy, but others only show points. They must always show the annual percentage rate (APR), however and this is an adequate substitute because it is calculated using all lender fees. If you compare two FRMs at the same rate, the one with the lower APR has the lower total lender fees. Note: APRs of FRMs with different interest rates are not comparable.
The Certified Lender Network makes this easy by allowing you to select the combination of interest rate and lender fees you prefer before selecting the lender.
Comparing Costs on ARMs
Borrowers who are 95% certain they will pay off their mortgage before the end of the initial rate period can use the same method to determine the best deal on an ARM as on an FRM: select a common interest rate and compare total lender costs at that rate. You can compare different ARMs, or an ARM with an FRM. Note: On an ARM, you cannot use the APR as a proxy for total cost, you must get cost data from the lender.
If there is a significant probability that you will still have the mortgage at the end of the initial rate period, I suggest you use calculator 9a, Interest Cost Calculator: Fixed-Rate Mortgage Versus ARM With No Negative Amortization, to calculate interest cost over both the initial rate period and that period plus 5 years. Interest cost is a comprehensive measure of cost similar to the APR except that it can be calculated over any time period – the APR assumes all loans run to term.
To calculate interest cost over the longer period, you must know the features of the ARM that affect the future rate. These are the margin, index and rate caps. Upfront Mortgage Lenders (UMLs) disclose this information on-line, but most other lenders don’t. You have to get it by asking. Make sure the answer is in writing.
The calculator must be told what happens to the ARM rate index after the initial rate period ends. I recommend two polar assumptions: “Stable Index” and “Worst Case”. Then for each ARM, you have one cost figure for the shorter period, and two for the longer period that bracket the possible outcomes.
The Certified Lender Network builds rate scenarios into the decision process so that borrowers considering ARMs have a good sense of the risks involved.
Locking the Price
Finding the best price quote is one thing, having the selected lender confirm the price in a lock confirmation statement is another. A lot of nasty things can happen between the time you receive a price quote and the time you lock. For that reason, I recommend that borrowers examine the lender's lock policies at the same time that they price the loan. Read Locking the Mortgage Rate Has Become a Challenge, and A Lock Statement For Lenders -- And For Borrowers.
Borrowers using the Certified Lender Network are completely protected against shenanigans associated with the locking process.
Third Party Services
The procedures described above do not take account of the cost of third party services, including title insurance and appraisal. Borrowers are typically steered to service providers, many of whom will over-charge them. This is a weak point of the system that I have written about on many occasions. However, the largest third party charge is title insurance, and in some cases, borrowers can now save money by purchasing their own title insurance on-line from www.entitledirect.com. If they use the Certified Lender Network, they can shop Boston National for title insurance, and MGIC for mortgage insurance, right on the site.