Getting the Best Mortgage

from realtor.com

There is more to a loan than getting the lowest rate

For some strange reason, bragging about a mortgage rate takes on such status as how far one can hit a baseball or how big the fish was. Maybe it tells everyone "look how savvy I am at picking out the lowest interest rate!" or "Yeah, I thought about locking but I knew rates were on their way down so I waited." I've been at dinner tables and heard people, one by one, go around bragging about their rate. It's really weird. Did these people know something others didn't? Of course not. Most likely they were lucky. Or maybe, in fact they did do a few things that, while not guaranteeing them the lowest market rate, certainly helped their chances.

The first thing in locking in the best interest rate is to not fog everything up comparing everything under the planet from the number of days to the Summer Solstice to the Construction Spending numbers released later this month. The biggest culprit in rate confusion? Comparing different loan programs.

Comparing rates from one lender to another is tough enough, at best. But trying to compare rates on multiple loans, from multiple lenders, makes it even tougher. Face it, no matter what anyone tells you, identical loan programs from different lenders are tied to the very same index. What makes one lender different from another? If it comes to comparing the very same loan program, then there really is no difference, as long as you get the loan you wanted at the right price and at the right time. Lender A looks like Lender B when you go to the Settlement Table.

Before I get jumped on by account execs from different loan companies telling me about their great customer service, their Six Sigma program or maybe their Customer for Life attitude, I didn't say there's no difference between loan officers. There are maybe more differences in loan officers than there are stars in the sky, but their responsibility to you stops or starts, based upon how successful a career in mortgage lending they want to have. But again, that's where you can be led astray. This column is about finding the best interest rate.

You have to decide, without a doubt, which loan program is right for you. Period. Don't go backwards and second-guess yourself. Decide and move forward. It's perfectly advisable to have at least one or two Loan Officer Superstars offering advise as to which programs would work best, given your goals, but the very first key in getting the best rate is deciding on a program and sticking with it. One can never, ever, compare apples and oranges in the mortgage business. We have more apples, oranges, pears, peaches, kumquats, and grapes than you can imagine. And we do it on purpose.

For instance, you call lender A and ask them for their quote on a 20-yr fixed rate mortgage and they offer 5.75 percent. Let's say you then call Lender B and Lender B knows they're slightly out of the market. So they'll reply, "My 20-yr fixed rate mortgage today is at 5.875 percent, but let me ask you a question, how long are you going to stay in your home? Is this your first house? Will you live there for 20-years? Have you thought about a 5/1 ARM? Have I told you about our brand new Payment Option Plan?"

If the loan officer is worth his or her salt, they'll have talked you into comparing other loan programs, hopefully finding one with a better rate. With Lender B's help, did you decide on a 10/1 Interest Only Loan with the rate being much lower than the 20-year fixed? Bingo. Lender B wins. And you didn't call Lender A back.

You broke the first rule of finding the best rate. Instead of "hunting," you went "fishing." Don't let loan companies talk you into other programs after you've made up your mind. Sometimes it's nearly impossible to get an apples-to-apples quote in the mortgage business. And it's tough enough to nail the lowest rate as it is. Don't muddy the waters with multiple choices. Stick to your game.

 

What does the Consumer Price Index (CPI) number and your mortgage rate have in common? If the pundits are right, the CPI may directly affect mortgage rates almost immediately after they're released. PPI? Probably. What about Non-Farm Payroll numbers, will they have an impact? Most every time. The fact is that our economy has a direct impact on interest rates. If your goal is getting the best rate, then you need to know how economic data can increase or decrease market rates.

First, it's important to understand how economic numbers can affect interest rates, including fixed mortgage product. Generally, interest rate gurus look at two things: an overheated economy, and inflation. As an economy picks up steam, businesses look to expand by making more products or providing more services. When they do, they increase the demand for money in terms of expansion capital, they find they can charge more for their products or services. Demand for capital increases the costs of borrowing -- banks can charge more for their loans -- and being able to charge more for a box of widgets drives up prices.

Both capital demands and higher prices mean inflation. Inflation kills an economy, and it's a key item The Fed watches when deciding to increase, decrease or keep rates the same.Why does that matter?

In the first party of the series, we explored mortgage bonds. Mortgage bonds are no different than any other bond; they offer a fixed return over a fixed term. A bond could give an investor a 5 percent return over 3 years, for instance. There is little risk in bonds, especially when compared to equities which can rise and fall on the trading floor. In a dragging economy when stocks aren't doing well, investors can instead get a solid return by investing in bonds. In this case, mortgage bonds. Yeah, the return may not be as great as a good stock pick, but if there aren't any good stock picks investors look at bonds.

If a bond yields $10,000 over three years to an investor, that could be a solid return. But only if inflation doesn't eat away at the yield. Because the return on a bond is a fixed amount, it doesn't adjust with inflation, it remains the same. If inflation increases by 5 percent each year, after three years that same $10,000 is worth much less than originally promised.

Truth is, there are plenty of armchair economic forecasters that play this game each and every day. The other truth is, no one, absolutely no one can know what the economic numbers will be. It's really a 50/50 gamble. If you wait, you might be right.

In short, the better the economy, the greater the likelihood for inflation. People pull money out of bonds, driving up rates. Poor economy? Lots of people out of work? People pull money out of stocks and into bonds. Bad economy, low rates. Strong economy, high rates. Generally speaking, of course.

So how does that affect you? Many consumers pore over economic data, watch the financial news channels and try to "position" themselves into picking their interest rate at the perfect time. I can't tell you how many times I've heard something like, "Nah, I'm not going to lock today, I think the economy is in terrible shape. I'll lock after the Unemployment Numbers are released this Friday" or some such. The theory is, if a bad unemployment number is evidenced, rates could indeed drop. Or, if the Consumer Price Index shows that Consumer Prices are stable, then rates could take a breather. Or not.

The problem with economic data and interest rates is that you'll only be able to take advantage if the numbers work in your favor. If they don't, you lost out big time. How so?

If rates on Thursday are 6.00 percent and you decide to wait until Friday's Non-Farm Payroll Data is released, if you're right and the economy is still dragging, you'll most likely see a slight rate decrease (all other economic/political factors being equal). You win. But if Non-Farm Payroll numbers are stronger than expected, and lots of folks are back to work making big bucks then it's too late. You lose. Lenders issue rates every morning and typically wait until most economic reports have been released before setting their mortgage rates. The nice little 6.00 percent on Thursday is now 6.25 percent and rising on Friday.

The most frustrating part about getting the best interest rate is actually getting a rate quote you can trust. Some of these tricky loan officers will make used car salesmen seem like saints when it comes to quoting an interest rate. Want 5.00 percent? Sure, we got 5.00 percent! Then you go to your closing and yes, you got 5.00 percent alright, but you also got hit with points, origination charges, administration fees, commitment fees, processing and underwriting charges. Not worth it, right? Part 3 of Getting the Best Interest Rate will focus on getting the rate quote right every time by considering closing fees.

Stop me if you've heard this one before, but part of the Federal Truth in Lending Law, specifically Regulation Z, requires that those who quote consumer rates, including mortgages, must also quote the Annual Percentage Rate. No big news flash there. The APR is the cost of money borrowed expressed as an annual rate. The problem lies not with the APR, but the misapplication, misunderstanding, and flat-out abuse of the APR.

APR abuse can be intentional, or it just be a dim loan officer who can't explain the offers he selling. The APR number is supposed to reflect not just the note rate itself -- the rate you actually pay your mortgage with -- but it also includes additional fees associated with that rate. A note rate of 6.00 percent with lots of lender charges such as points, processing, underwriting and so on could result in an APR of 6.50 percent for example. A note rate of 6.00 percent with little or no lender charges other than maybe an appraisal and prepaid interest could have a smaller APR like 6.11 percent. The greater the variance between note rate and APR means there are lots of associated closing costs. At least that's the application theory.

The fact is, the APR number is so often misquoted that many loan officers dismiss its utility at all. I disagree with that. The APR is a very useful number... as long as it's used correctly. But that's where you can run into trouble. Especially if your loan officer can't tell you which closing costs were used when calculating APR.

Instead, try this; get a rate quote for the same period of time, say 30 days, and ask for one with no discount points or origination charges. Get your quotes from your different lenders at the same time of day and also ask them for a list of Lender charges, more specifically those listed in the "800" section of the Good Faith Estimate. It is here, that fees used to help calculate APR are located and can include all lender or broker junk fees such as Administration or Processing, Discount Points or Points, Origination fees, and more.

None of the other charges such as title insurance, or attorney, or escrow really matter when comparing interest rates. Your lender or mortgage broker have nothing to do with those charges. And don't let a loan officer try to confuse you by giving you a "total" estimate of costs. Instead, thank you very much, just give me those fees listed in the 800 section. That's all you really need to compare rate quotes.

If you're working with a mortgage banker, those fees should, mostly, be set in stone. If you're working with a mortgage broker, those fees can change depending upon which lender the broker is quoting. If you're working with a broker, go ahead and ask them who those fees belong to, be it Countrywide or BankAmerica, Washington Mutual or whomever. There should be no reluctance in telling you who the lender might be. Even at that, competitive wholesale lenders should have about the same amount of charges as one another. They might call them different things, but their totals should be about the same.

The absolute key with this process is to only include 800 series closing costs. Don't worry about hazard insurance for example, your lender has no control over that, nor do they have any control over the cost of an escrow. That's the biggest trick in the world; to low-ball third-party fees to make the mortgage brokers overall package look sweeter. It won't be. Those third-part fees are what they are. Yeah, I know that there are some negotiated package deals that can reflect reduced fees, but that's the exception, not the norm.

Over the past few weeks one thing has remained constant in this series on finding the best rate... and that is being consistent, and not getting distracted. Don't let someone else confuse the issue. Be strong and be aware. Some of those loan officers out there are pretty sneaky.

 

Getting an interest rate quote and getting that rate guaranteed are two different breeds. Also, rate quotes can vary depending upon how much time you have until you close. Or at least they should be. Interest rates and time go hand in hand, the longer you need, the more expensive it gets.

Locking in your interest rate means two things; your rate won't go up if rates in general go up, and your rate won't go down if rates in general go down. When you lock, you lock. I know there are variations on this theme such as "floatdown" loans that allow you to re-lock your rate should rates move down during your lock period, but overall lenders take interest rate locks just as seriously as you do.

The most important feature of a lock is that it lasts long enough to get your deal closed. If your closing is scheduled within 30 days, then you need a 30 day lock. If your closing is within 15 days, then you might get a 15 day lock. 15 day locks are less expensive than 30 day locks. How much? Usually about 1/8 of a discount point. On a $100,000 loan, that's about $125 more to lock for 30 days than for 15.

Do you have a longer escrow period, say 60 days? If you want to lock in current market rates, then you can expect to pay more in either rate or point. For each additional 30 days, you can expect another ¼ of a discount point, or maybe 1/8 percent in interest rate.

This is why it's vitally important when getting rate quotes for the same lock period. Don't call some lender up and ask them what their rates are, ask them what their rates are for the time needed to close your deal. Another sneaky loan officer trick? Quoting ultra-low rates for very short terms, such as three days. "Yeah, I've got 4.50 percent today but that's only for loans that are closing this week. If I had your loan I could get you that rate, but I really can't lock in your deal unless I've got your loan." You then assume that "Why goodness, these people are lower than anyone else!" so you submit your loan, then find out that their rates are, in fact, pretty much the same, if not higher, than all the other lenders.

Another version of this rate trick is reserved for those who are buying new construction. Say your new home will be finished six months from today, so you call other lenders for rate quotes and you find out that, yes, you can lock in a rate for six months but it gets rather pricey, so you decide to wait.

But one lender in particular has interest rates almost ½ percent lower than everyone else. "Why yes, Mr. New Home Buyer, my rate today is 4.50 percent, but unfortunately I can't lock that rate in that long. But if you go ahead and submit your loan and application fee, I can get you in process and lock you in the closer we get." You may find that as you get closer to your lock period, that lenders rates are just like everyone else's, except for the fact that if you change lenders, you've lost your application fee. Sort of like application fee hostage.

When getting a rate quote for new construction, don't tell the loan officer that you're closing in four to six months. Instead ask for a rate quote for 30 days. It's impossible to compare apples and apples without making the time factor equal as well. After all, time is indeed money, right?

 

You found the right agent, you found the right home and you found the best lender. Right? But most of all, you got the best danged interest rate in these here parts. You got the interest rate by doing all the right things and you got advice from someone "on the inside."

The mortgage market is no different than any other product or service. There's competition and plenty of it. Not only that, but it really doesn't take a whole lot to get into the mortgage business. Yeah, I know there's licensing and continuing education in most states, but really, one doesn't need a 4-year college degree to push a loan.

That does a couple of things; one, the level of professionalism can be hurt. If it takes very little to get in the business then how do you really know who you're dealing with? The mortgage business can be very fluid, lots of folks coming into the business while at the same time lots of others leaving it. It also leads to a marketing maze, confusing the consumer with jargon never before heard.

Mortgages have positioned themselves as a commodity; after all, that's what the Secondary Market (Fannie and Freddie) has tried to produce. And if a commodity is truly defined as a "product where the determining factor is price" then you can see how tricky sales tactics can influence mortgage rates on the consumer level.

But you rose above all that. You followed the tried and true tactics of getting the best rate. What did you do?

 

1. You went hunting and not fishing. What is meant by that? You have to decide up front, at the very beginning which loan program works best for you. Cross your heart and hope to die. When you go hunting, you know what you want and you set your sights on your goal. If you simply "fish," then you're only throwing some bait in the water not knowing what's going to bite. When you do hook one, you get whatever you reel in. Or worse, you're the one that gets reeled in.

When loan officers can't compete on a particular loan program or they find they can make more money on another loan they'll try to steer you away from your selected loan program. This defeats the whole purpose of finding the best deal. You can't compare one loan against an entirely different loan when you're looking for the best rate. It is imperative that you truly compare apples and apples.

 

2. You also timed the market well and understood how economic data can impact an interest rate. Gambling types try and outsmart the market, let their interest rate "float" until after such-and-such report, and knowing (betting) that the report will lead to lower rates.

If you guess right, you get a better rate. If you guessed wrong, you lost.

 

3. You also understood the importance of comparing closing costs along with the interest rate. What

good is 6.00 percent compared to 6.125 percent if the lower rates costs you several thousand dollars? Not much.

The Annual Percentage Rate (APR) is a tool used best by those who know how to use it. The APR is an oft-misunderstood number, but when used properly allows you to truly compare rates from different lenders. Lenders can offset a slightly lower rate by increasing their "junk" fees such as Loan Processing or Administration. By comparing not just the rate but also the lender fees associated with that rate you know what you're getting.

 

4. Time is money. And the longer you tie up money, the more that rate will cost you. If you're refinancing, you have the supposed luxury of waiting to lock in your rate whenever you fell like it. If you're buying and closing at the end of the month, you don't have that luxury. You have to close when the contract says so.

When comparing rates from different lenders, you need to consider the lock period required along with the closing costs. Get a quote not just on rate and fees, but compare the same lock period as well, giving you enough time to close your deal.

There. Easy enough, right? Don't let loan officers try and confuse the issue with marketing tricks like different loans, different closing fees or shorter lock periods. The mortgage industry has, successfully, made mortgages difficult to understand. But now you're ready for them.