I like to keep things simple. In fact, the longer I work in this business, the more I realize consumers want things as simple and plain as possible even when it would be to their advantage to understand the complexities of the mortgage market and their largest financial transaction. As such, I was trying to figure out a way to simplify rate shopping so anyone could understand what has to be considered when choosing a mortgage. Relying on my years as a management and strategy consultant cranking out ungodly amounts of presentation slides full of useless graphs, charts, and business paradigms, I came up with the mortgage triangle. Like all ground breaking ideas, I scribbled it on a napkin.
The triangle conveys the three main points of any mortgage loan. low rate, low fees, and great service. After years of testing this theory in a controlled environment, I have come to the conclusion that the consumer can only pick two of the three. It is against the laws of mortgage physics to obtain all three at the same time and if this were to occur, the universe would self destruct across space and time.
Let’s exam the available combinations:
Lowest Rate and Lowest Fees: If you simply pick the lowest rate and lowest fees, service will invariably suffer. The service component of a mortgage is one of the most overlooked aspects of mortgage but it is the most important. I define service as actually being able to close the mortgage loan at the rate and fees quoted in a timely manner and with the right loan product for your situation. The experience a consumer has with obtaining their mortgage is largely dependent upon the loan officer who is handling the transaction which is why it is important to shop the loan officer and not the mortgage. As such, when you have the absolute lowest rate and lowest fees, you cannot by definition have the best loan officer working on your deal since loan officer compensation is directly impacted by rate and fees. The best loan officers are never the cheapest, nor are the most expensive. They may be the most competitive in terms of all three choices, but never the cheapest. If you got a loan and had a great experience with the loan officer, I am willing to bet money that if you kept calling around, someone else would have probably done the loan a little cheaper. This is not to say you got a bad deal, just that there is ALWAYS someone who can claim to be cheaper. However, whether they can actually delivery is an entirely different topic.
Lowest Rate and Best Service: It is possible to obtain the absolute lowest rate on a mortgage and also get great service. However, the fees will be higher. Interest rates and fees are linked. As interest rates go down, fees will go up and vice versa. Again, this is one of the laws of mortgage physics that cannot be broken. The bottomline is closing costs will be higher in the form of discount points, origination fees, and lender fees. This isn’t necessarily a bad thing as it sometimes makes financial sense to pay higher fees or points to get a lower interest rate.
Best Service and Lowest Fees: In this scenario, the interest rate will be higher. If lender fees are low or non-existent, it is because the interest rate is higher than otherwise available. Period. There really isn’t much else to say.
Most consumers immediately gravitate towards trying to beat the system by getting the lowest rate and lowest fees and great service. Again, you can’t break the laws of mortgage physics! When this occurs, many will actually cross over into a parallel universe where they actually get the highest fees, highest rate, and piss poor service. Occassionally, we are able to pull them back into reality, but sometimes it is too late.
Shopping for a mortgage is easy. Just remember the triangle.
Once again, Russ, right on the money and communicated perfectly for the intelligent borrower with whom the “professional” LO/Broker truly wants to have a business relationship. The loans we have gotten so far, as a new company getting started in a tough environment, have been because borrowers have been fatigued by the process of discovering that “no cost and lowest rate” either doesn’t exist or it comes at a price too heavy for the borrower who understands the importance of getting their mortgage transaction right. Our marketing message (as well as our core values) really seek to define ourself within this niche. As I have mentioned before, seeing an established professional such as yourself sticking to the same values and being successful is very heartening. This is especially true as in recent weeks it is becoming clear that some big lenders (Countrywide, Bank of America, others) have decided to respond to the changing market not by pledging uncommon service, but by hopping on the “no cost” advertising message band-wagon.
Anyway, solid and timely entry once again. Kudos!