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Archive for the ‘Rate Shopping’ Category

One of the most confusing aspects of mortgages is the rate lock.   In its simplest form, a rate lock essentially means the lender is setting money aside to lend to you at a specific interest rate.  Basically, a rate lock is a guarantee of the interest rate assuming you are approved for the mortgage.  It is very important that consumers understand how rate locks work.

Mortgage Rates Change Everyday:

Mortgage rates are a function of the pricing of mortgage backed securities.  As a result, the pricing lenders offer change EVERY SINGLE DAY.  If you are shopping mortgage lenders, you cannot call one lender on Monday and another on Tuesday to get an apples to apples comparison.  You have to call every lender on the same day.  This is especially important now because the market is so volatile that mortgage rates actually may change multiple times PER DAY, not just daily.  In order to have an accurate rate quote, the quote must be a quote that can actually be locked that day.

Time Frame:

The vast majority of lenders will only lock interest rates in 15 day increments up to 60 days.  Most home purchase take about 45 days to close from the date of contract to closing.  See the connection?  Rates are locked for 15, 30, 45, and 60 days in most cases.  The longer you need to lock the rate, the more expensive the mortgage will be.  There can be up to a .375% difference in rate between a 15 day lock and a 60 day lock.   It cost more to lock a loan for longer time period because it increases the chances that the lender will not actually close on the transaction.  Lenders track how many loans they have locked and if the loan will actually be delivered in order to hedge their capital.  The cost of that hedging goes up the longer the locks have to be in place.

Property Address:

Lenders will not lock interest rates without a physical property address.  In other words, no lender will guarantee an interest rate during the pre-approval stage if you are not under contract to buy a home.  There are a few banks who have “Lock & Shop” programs, but in most cases, the rates are not competitive to the current market.

Floatdowns:

Consumers often want to know what happens if they lock and interest rates go down.  Most lenders have in place “floatdown” policies.  This means the loan officer may be able to negotiate a better rate.  However, floatdowns are not free in most cases.  Consumers need to understand that a rate lock is a rate lock.  In other words, you can’t have your cake and eat it too.  The bank is not going to call you and raise the rate if the market worsen’s after you lock, so they aren’t necessarily going to lower your rate either if the market improves.  Often times many unscrupulous loan officers will use this as a sales tactic by insisting they will lower rates after a rate lock.  It is possible, but it isn’t as easy as it sounds and is dishonest to say it will automatically be done.

A Rate Quote is NOT a Rate Lock:

 A rate lock is when the broker selects the wholesale mortgage provider and takes the formal step of actually “locking” with that lender at a set interest rate within the constraints above.  Consumers should ALWAYS ask for some type of written confirmation that the rate is locked.  Simply calling around getting rate quotes is not the same thing as when a lender formally guarantees the rate. 

If you are transaction does not fall within the guidelines above it is POINTLESS to get rate quotes.  In fact, you should run, not walk, from any lender who willingly gives out rate quotes without you actually having identified a property and being within 60 days of needing to close.  The quote is worthless and most professionals won’t waste their time lying to you.

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One of the hardest concepts to get through consumers thick skulls is that a good faith estimate is not a commitment to lend.  A lender giving you a GFE does not mean that you are approved for a mortgage nor does it mean the lender is actually able to deliver what is being promised.  Consumers often times hang all their faith on GFEs.  But who can blame them?  They are told by Suze Orman, Clark Howard, Realtors, and everyone else who doesn’t know jack squat about mortgages to get a GFE like it is some kind of binding contract that absolutely cannot be broken. Take for instance this email I received from a client the other day:

At about the same time that we received your pre-approval we were advised to use Bank of America in times like this because they were an institution still afloat and they also agreed not to charge us an origination fee.  At the time, we were quoted an FHA rate of 6.25% and were not expecting anything unusual to happen (I know…we should have followed the advice on your blog).  Anyway, we are now being quoted rates as high as 7.5% and we are getting close to our breaking point.  We were wondering if there’s anything that could be done as far as getting better rates etc. for an FHA stimulus jumbo?

This is a classic case of the borrower relying too heavily on the GFE presented by a call center based loan officer at a big bank.  The borrower obviously went against their better judgment but the pull of a too good to be true interest rate was too strong.  It is also important to note that just because a mortgage company is a big bank does not mean they hire qualified loan officers (in most cases, the least qualified loan officers work at big banks) or won’t pull a bait and switch.

Don’t get me wrong, every consumer should get a good faith estimate from their lender.  In fact, lenders are required by law to give you one within three business days of a loan application.  However, what is important to note is that a good faith estimate is an ESTIMATE and it does not have to be accurate.   The dumbest thing consumers do is choosing a mortgage lender based solely on a GFE with the lowest cost. The GFE is only as good as the person preparing it.  This is why I always say you need to be shopping the loan officer and not the mortgage.  Only by vetting the loan officer can you be sure that you are being told accurate information or at the very least significantly reducing the risk of being lied to.  Remember, buying a home is YOUR LARGEST FINANCIAL TRANSACTION

Don’t you think you should be interviewing the loan officer or broker more in depth to really see if they are qualified?  Very rarely do consumers ever ask their loan officer where they went to college.  How long have they been in the business?  Who their typical clients are or their specialty?  How much business do they close annually?  What is their take on interest rates?  What is their competitive advantage?  What did they do prior to mortgage lending?  Referrals from satisfied clients?  Nope…  It is always what is your interest rate?

The focus on interest rate is understandable.  However, too many consumers don’t understand the difference between getting the cheapest mortgage and the best value.  Mortgages are a very complex financial product and often times consumers attempt to compress what is a multi-dimensional transaction into a one or two dimensional number.  What usually happens is that consumers rate shop themselves out of great mortgages in the name of trying to get one just a little cheaper.  They basically go from getting a good deal to becoming the sucker of the minute.

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One of the things experienced mortgage professionals hate to hear from consumers is the whole “send me a good faith estimate” stuff.  Don’t get me wrong, I always provide a GFE to my clients.  However, I have found most consumers have no clue how to actually read a GFE or know how to compare one against the other.  So from my perspective, I view providing GFEs as basically shooting myself in the foot since I know my GFE is accurate vs that of many of my competitors which could be used as toilet paper.

As a consumer, you first need to realize that a good faith estimate is an ESTIMATE.  It isn’t written in stone.  It isn’t permanent.  Most importantly, a GFE is NOT A COMMITMENT TO LEND MONEY.  Let me repeat, a GOOD FAITH ESTIMATE IS NOT A COMMITMENT TO LEND MONEY.  In other words, just because Joe Blow loan officer gives you a good faith estimate with an ultra low rate, it does not mean that he or the bank will actually deliver that rate.  This is why you need to also need to be vetting the loan officer to ensure they are knowledgable.

So how do you actually read a GFE?

GFEs are broken up to into three major parts.  Any good faith estimate you receive from a lender should be constructed as follows.  If they cannot provide one in the following format, you need to find a different lender.

Section 800, Lender Fees:  Any fees charged by the lender will appear in this section.  The important thing to remember is that the name of the individual fees are not important, but the sum total of those fees.  When comparing GFEs from two lenders, it is important to note that the fees in this section are the only fees that can be compared!  All of the other sections listed below are not controlled by the lender, which is why accuracy is important!

Section 900 & 1000, Prepaid Items:  This section contains items that the bank requires you to pay in advance.  The cost in this section normally consist of prepaid interest and tax escrows.  Prepaid interest is just interest from the day you close until the end of the month.  Tax escrows is a number of months of taxes required to fund the escrow account.  The amount collected depends on when taxes are due in your area.  The tax escrows are the only other item that may differ from lender to lender.  Some lenders may waive the escrow requirement (typically for a .25% fee that is built into the rate).

Section 1100, Title Fees: Title and escrow companies are usually chosen by the seller.  So once again, the bank does not control these fees.  

Section 1200, Government and Transfer Charges:  This is where any taxes or government associated fees will be listed.  Again, not controlled by the lender.

As I mentioned, the only fees that the bank really controls are the lender fees in section 800.  Often times, inexperienced or unscrupulous loan officers will low ball the other sections to make their GFE look cheaper than the competition because they know most consumers only focus on the bottom line, not knowing that only section 800 really matters.   For example, I have seen some lenders leave off the Chicago City Stamp with can easily add $2000 to a typical closing in Chicago.  I might have lender fees of $500 bucks vs $1500 somewhere else. However, the other bank didn’t put the city stamp on the GFE so it looks like their overall closing figure is cheaper when in fact it is not.

When comparing offers from two different banks, you can only compare lender fees (section 800).  All other fees will be same. 

I pride myself on providing very accurate GFEs.  I am rarely ever off more than $100 bucks which is great considering an estimating OTHER PEOPLE’s fees, not my own.  Under no circumstances should lender fees change from when the GFE was issued.  I have also learned to be ultra conservative and OVER ESTIMATE closing costs.  It is a lot easier conversation to have with clients that thier closing costs are lower than originally estimated than the other way around!

Remember, the GFE is only as good as the person providing it.  You should be looking for accuracy, not lowest cost.

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I haven’t posted much over the past few days because I have been bombarded with fire drills to help save loans for borrowers whose lenders either went belly up or because the lender is no longer offering certain loan programs.  The mortgage market is in a tough time right now as Wall Street has cut off funding for many mortgage lenders and mortgage investors are demanding higher quality loans.  Unfortunately, until they get their heads around the problem (or out of their asses) they are also throwing out the baby with the bath water. 

Even the most credit worthy borrowers can find themselves without money the day of closing.  The bottomline is consumers need to take a step back and reassess their choice of lenders and focus on reliability, expertise, and access to funds instead of blindly rate shopping at this point in the game.  It is now more important than ever to shop for a reliable mortgage broker, not simply a mortgage.

Fortunately, most of the emergency loans that have come into my office I can do with very little increase in promised rates and in some cases even better which illustrates why it is important you understand how to pick lenders who have options in case something does not go as planned.

In order to navigate this market, consumers need to:

Choose Mortgage Brokers, Not Mortgage Banks:  Most retail mortgage banks only offer their specific loan products.  If their access to funding dries up or underwriting guidelines change, you may be left without financing options.  Good mortgage brokers have access to dozens if not hundreds of lenders.  If one bank can’t do it, we can find another who will.   You need to ask your lender about how many end lenders or investors they work with.  More specifically, ask if they have a back up lender in place if the original investor can’t do the loan.

Correspondent Lenders are Better:  Correspondent mortgage lenders are basically mortgage brokers on steriods.   A correspondent lender can underwrite and fund their own mortgages through their credit lines and sell them off to investors after closing.  The reason it is important to work with a correspondent is because if there are problems, we can usually just change who we are going to sell the loan to after closing.  This means we can continue to meet established timelines in most cases.  Traditional brokers are at the mercy of the turn times of the actual lender, so if you only have two or three days to fix a problem, a regular mortgage broker may not have enough time to get the loan resubmitted to a new lender in order to meet the closing date. 

Grill Your Loan Officer:  Make sure you are dealing with an established professional who understands underwriting guidelines and what can get done in this market.  An established professional means they were referred to you by a trusted co-worker, Realtor or family member who has dealt with the lender previously.  It also means they can demonstrate a signifcant book of referral based business (closing at least $10 million/year in deals).  You do not want to be dealing with newbies and “call center order takers” in this market who are learning the ropes on your largest financial purchase when you could have tens of thousands of dollars at risk.  Make sure your loan officer has at least three years in the business doing purchase loan transactions and “A paper” lending. 

Pre-Approvals are a Must:  Financing comes first, not house hunting.  Absolutely do not make offers and submit earnest money on properties without a solid pre-approval from the mortgage broker you have chosen.  Pre-approval means you have submitted credit, income, and asset documentation to the lender and the loan has been formally underwritten.  Demand to see the conditional loan approval signed by the underwriter verifying the loan is approved at the terms promised.  Finally, under no circumstances should you waive your right to a mortgage contingency in your contract.  The mortgage contingency gives you an out and protects your earnest money if for some reason you can’t get financing.

It is Not About Rate:  Getting a good deal is important.  However, attempting to save .125% and $50 bucks only to have the deal blow up in your face at the closing is not worth it.  Being able to sleep at night knowing your deal is secure is a lot more valuable.  Reliability and the ability to get it done on time as promised is what is important right now.  Rate shoppers beware.  

 If you are unsure about your financing options or just want a second opinion, do not hesitate to give me a call.

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shoppers.jpgI 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.

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ex-10229.jpgSeveral weeks ago, Bank of America announced to the world that they were going to change the mortgage world by offering their No Fee Plus mortgage.  This mortgage is supposed to be revolutionary in that it offers the following:

  • -Up to 95% financing with one loan
  • -No Private Mortgage Insurance (PMI) required
  • -No tax escrows
  • -No closing costs (lender or title fees)
  • -Purchases only, refinances not eligible

Bank of America is so confident that they will pay up to $250 dollars if their borrowers find a cheaper mortgage elsewhere. 

First, what is being offered is nothing new.  Good mortgage brokers have been structuring mortgages like this for years.  You don’t want to pay PMI?  Fine, we give you lender paid PMI or a second mortgage.  You don’t want to escrow taxes?  Fine, you have a choice.  Just ask.  Don’t want to pay closing costs?  Fine, your rate is slightly higher and we can waive all closing fees.  It is all how you structure the loan.   This is the difference between dealing with a professional who can develop varying programs for your particular situation versus an order taker working in a call center.  All of my clients know I can structure a loan anyway they want.

I decided I would call BofA today to see if they are really offering a good deal or just playing a shell game with consumers.  I rarely lose deals to bloated retail banks, so I figured this wouldn’t be any different.  I had the “mortgage specialist” price out a very simple scenario of:

  • $400,000 purchase price
  • Single Family Home
  • 740 FICO Score
  • No Points
  • 30 Year Fixed Rate
  • 5% Down Payment

After telling me that BofA is the only lender than can do offer the No Fee Plus mortgage, she quoted me a rate of 7.125%.  I randomly picked a rate sheet of one of the 10 or so major “A paper” lenders I like to use.   At 7.125%, I would have been earning a yield spread premium (profit) of 2.422% or a whopping $7,750!  At this rate, I can easily give up $3000 to pay lender and title fees and still have $4750 in profit!

However, the goal is to beat the deal.  So I priced a first mortgage at 6.875% and a second mortgage at 8% so we can avoid PMI.   I was still making 1.522% in YSP on the first and .5% on the second for a total of $5266.44.  Again, I can easily give up $3000 to cover the borrowers lender fees and title fees and still net $2266.44.  Not bad for a days work. 

The borrower gets a better deal with my loan as the combined mortgage payment of the first and the second mortgage is about $18 per month cheaper.   The bottomline folks is that nothing is for free.  You are going to pay for it somewhere.  What I found hilarious is that the talking head on the website swears that they don’t raise the interest rate to cover costs.  Either someone in marketing is lying or their rates suck.  I think I just proved that.

To be fair, the BofA deal may actually be pretty good if you have a very small loan or marginal credit.  However, I do not know if they change their terms based on the loan size or what they are requiring for a minimum FICO.  Marginal credit buyers are going to have much higher rates on second mortgages which may make getting one loan with no PMI more attractive.  It is also harder to give competitive rates and large closing cost credits with smaller loans as well.  Sometimes retail banks can be more competitive on puny deals because they will just eat the loss.

Nevertheless, they are offering to pay $250.00 if you get a better deal elsewhere.  I am going to start my own marketing campaign where I will guarantee that BofA will pay you $250!  Call them first and then call me.  I will split it with you.

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starbucks.jpgI am sure you have seen it by now, but there is a Coffee Calculator that was flying all over the web a few weeks ago that shows how much money you would have if you invested the money you spend on coffee at Starbucks. The website is hilarious and quite frankly as a certified coffee addict, I know for fact my portfolio is thousands of dollars smaller than it would be if it were not for coffee. Nevertheless, I believe man should have a few vices to stay sane.

The website uses very simple linear logic of evaluating the lost opportunity of not investing money that is spent on the coffee. Instead of spending $3.00 on coffee, invest the money at x% return and you will soon be rich!

While the site is entertaining, what it fails to do is point out that you can use this type of logic on any part of your life. For instance, if I chose to drive a beat up lime green Pinto instead of my Volkswagen Touareg V8, I could have invested the money and would be x richer. Or better yet, if I chose to wear K-Mart kickers with hard ass rubber soles instead of my butter soft leather Ferragamo loafers I would also be a bit richer. Come to think of it, if instead of buying a limited edition Panerai watch, I should have bought the plastic digital Timex. I also probably should have reconsidered taking my wife to Aruba for our honeymoon too. We could have stayed here in Chicago and I would be much richer. I also should have not bought my bungalow in Oak Park and instead rented some 500 square foot studio next to a crack house in West Chicago. Hell, I would have been a millionaire by now. Oh the shame, what horrible financial decisions I have made with my life!

There is no part of your life that you cannot make this argument. In fact, what the examples above do is point out the absurdity of this line of thinking. See, you can make a numerical argument, but most of life’s decisions are not black and white and cannot be boiled down to a number. The Touareg costs dramatically more than a Pinto, but is much more fun to drive and reliable. Wearing Ferragamos is like heaven to your feet as opposed to some odd form of Guantamo Bay torture from K-Mart kickers. My Panerai watch will be passed on to my kids and will probably appreciate in value as a collectors item. My point is the numbers cannot quantify the intangibles. In fact, drinking coffee for me is a stress reliever and I know it is a complete waste of money, but there is a great comfort in my cup of coffee that simply having an additional $3.00 in my pocket will not provide. I also think you can see that living your life in terms of lost opportunity cost would probably make you miserable. You would be richer, but miserable. You definitely don’t want to be around me prior to my morning cup of joe.

How does this relate to mortgages? This line of thinking is what most rate shoppers do when selecting mortgage providers based purely on the lowest rate. You simply take monthly savings from the lower rate and carry it out over the life of the loan. The next thing you know, you saved a Gazillion dollars! There is nothing wrong with this logic except that many people do not do it in the context of it being the largest financial transaction of your life. Like with most of life’s decisions, mortgages are also not a black and white decision. Does having a low rate matter? Yes, but it isn’t the only factor that matters with your mortgage. You also have to consider if the lender can perform as promised – meaning you actually close on time at the rate promised with no hiccups along the way. What most consumers fail to understand is that a rate quote is just a rate quote. It doesn’t mean anything unless the loan closes. Some of the most fervent rate shoppers I come across use the linear logic of lost opportunity cost, but will think nothing of dropping $40k for a loaded 3 series BMW instead of a more fiscally prudent Hyundai. Both get you from A to B. Sure the BMW pulls more chicks, but so would having the extra cash in your pocket.

I understand why otherwise rational people act irrationally in the context of their mortgage. For most people, their mortgage payment is their largest monthly obligation. It is not a small feat to pay it and you can physically see the money going out the door every month. On the other hand, your coffee addiction is not as visible. You don’t necessarily feel the pain of spending $3.00 and you don’t tie it to anything in particular. With your mortgage, a payment of $1950 is better than a payment of $2000. It is right there on the payment coupon book, so most people disconnect themselves from the intangible aspects of the transaction and focus on the bottom line. In addition, obtaining a mortgage is not something that people do frequently so they don’t really understand the pitfalls of home buying and mortgages and why cheaper does not equal better. As such, it is difficult to explain that getting a mortgage is not as simple as calling around asking “what is your rate” and voila, you have a $500k loan.

Take this excerpt from an email I received from a client a couple of months ago:

“After careful consideration of all the alternatives available to us for financing, we have decided to use another lending institution… our decision was driven by available interest rates, closing costs…”

I closed this borrower’s transaction last week without a hitch. The other lending institution couldn’t close the loan because of the borrower’s employment status. Of course, this didn’t pop up until a little over two weeks from closing and borrower had $15k in earnest money that they were about to kiss bye bye. I am sure on my client’s next purchase or refi, he won’t be so focused on whether another bank is quoting .125% lower rates even though it would have made him a millionaire.

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