March 18, 2012

From the beginning, the basic promise of multi-lender internet-based sites was that they would provide one-stop shopping. With my colleague Jack Pritchard, I recently examined 13 major mortgage web sites to see how well this promise has been fulfilled.  

We found that many sites are less than forthcoming, and even misleading, just like the humans they are supposed to replace. This doesn’t mean you should avoid mortgage web sites -- they remain the best game in town. But great care is required in selecting the site on which to shop.  

You want to be able to shop effectively, which means that the price you ultimately lock is the lowest available from all the lenders on the site, for your particular deal, at the time of the lock. This article will indicate the major features a mortgage site should have for borrowers to shop effectively.  

Anonymous Shopping

Select a site that allows you to shop without revealing contact information. Otherwise, you will be besieged by telephone calls from the 3 or 4 lenders to whom your information has been sold. These are not the lenders offering the lowest price to you but the lenders offering the highest price for the information about you. The sites that operate this way will provide little or no help in making a selection among the lenders vying for your business.  

Complete Price Adjustments 

If the price you receive from the web site is not fully adjusted for all the characteristics of your loan that affect price, it is worthless. Any relevant feature of your loan that the site does not ask you about it assumes to be the best possible, which generates the lowest possible price. If the site does not ask for your credit score, for example, it will assume you have the score required for the lowest price, which means that if your score is significantly lower, your actual price will be higher. You won’t find that out, however, until later.  

Posted Prices 

Posted prices come directly from the pricing systems of the lenders. If prices are entered into the site by loan officers, who receive posted prices but are not bound by them, they cannot be relied upon. Loan officers may “low-ball” the price to snag shoppers and/or “high-ball” the price later on when the borrower has become committed. 

Real-Time Prices 

When lenders on a site change their prices, which happens daily and often more frequently, prices on the site should change automatically and simultaneously. Otherwise, site users don’t know whether the price on the site is live or obsolete. On sites that require manual updating, some lenders have a bad habit of forgetting to do it when interest rates rise, which makes their prices appear low compared to others. 

All Lender Charges  

To price shop effectively, all lender charges should be shown. Many sites show points, which is a single fee expressed as a percent of the loan, but leave out other lender charges that are expressed in dollars. 

Price Monitoring 

Selecting the lender with the lowest quoted price, even assuming that it is a posted, real-time and complete price, does not assure that you will receive the best possible deal because the lender you select is not committed to that price. The price must be locked, which usually takes a few days and sometimes longer. During that period, the market will probably change, and your price will change with it. Furthermore, in verifying the information you provided, the lender could modify the features of your loan that affect the price, such as the property value.  

Unless you can monitor the impact of changes in the market and in the loan features on the posted price, the final price may be higher than the one you deserve. Furthermore,  there is no way for you to know it.  

To shop effectively, the site selected should have the 6 features discussed above. In  addition, there are other site features that might be important to some borrowers.  

ARM Features  

Borrowers who might be interested in an adjustable rate mortgage (ARM) should assess the risks of future rate increases associated with ARMs. This requires information on the rate index, rate adjustment caps, margin, maximum and minimum rates. The site may or may not provide this information.  

Decision Support 

Many borrowers need help in making decisions about the type of mortgage, and the combination of upfront fees and interest rate that best meets their needs. The site may or may not provide such help. 

Third Party Charges

The total cost of a mortgage includes charges by third parties, including title insurers and mortgage insurers. The site may or may not help borrowers reduce these charges, which are often excessive. 

A table showing the features of 13 major multi-lender mortgage shopping sites can be found at Features of Multi-Lender Web Sites.