Mortgage Rates and Selecting a Mortgage Company

How valuable is interest rate-shopping?

Some consumers are under the impression that "rate shopping" is a critical part of choosing a mortgage lender. Rate shopping, however, is just a small part of the picture.

All mortgage rates are based on the prime rate plus a mark-up. Depending on the company, the mark-up could be overhead, operating efficiency, etc. Rates will also vary between the various mortgage plans available. Mortgage rates on fixed term mortgage products change daily. Thus, a telephone quote from a stranger whose motive is to grab your business is suspect.

The lowest rate is worthless if the loan doesn't close. One should never choose a mortgage lender based on rate alone. The point you save (or think you save) is meaningless if your mortgage doesn't close. If you can't "lock" the rate, move on--the rate was fiction. Even more crucial-why would you want to send a deposit and lock into a company you really don't know?

How do I select where to apply for a mortgage?

Banks and mortgage bankers usually write loans themselves. A mortgage banker is like an insurance agent who represents only one company (Aetna, Prudential, etc). Brokers are the "independent agents" of the industry, working with various lenders.

Mortgage bankers are the secure, "plain vanilla" of the industry. Whether your loan is from a bank or a mortgage banker, you can usually be assured of reasonable rates (though not necessarily the lowest). These bankers generally tend to reject "marginal" loans, while brokers tend to "shop" such loans to find a matching lender.

Brokers usually don't finance the loans they write. Instead, they work with a variety of lenders (mortgage bankers) around the country. Many lenders have unique programs designed to meet specific borrower needs. If the borrower has problematic credit, they'll try to place the loan with a more lenient lender. Brokers are usually far more flexible when it comes to loan products, rates and loan guidelines.

How do you select a mortgage company?

The best approach is not the rate approach, but the company review approach. Look at the business record of the company and "interview" its loan officer(s) for competency and compatibility.

A Simple Procedure for Selecting A Mortgage Company:

1. Survey the copanies in your area that offer the type of mortgages you are looking for. Don't contact anyone yet.
2. Select about 5 candidates for your business, then check the Better Business Bureau (BBB) or similar organization for unresolved complaints filed against them. Drop those with too many complaints.
3. Ask the target companies how their mortgage process works, about rates, etc. By actually talking to them, you'll be able to tell an experienced loan officer from a green one. Based on your observations, you can judge who has the best processing system, mortgage officer(s) and which loan product is best for you. Narrow the field to two choices.
4. Now you can rate shop. Realize that the rates quoted are not cast in concrete. You may still be 30-60 days from actually closing the loan.

Note: Those who rate shop need to have good credit, otherwise the exercise is meaningless. Rate quotes are based on clean credit.

Can I pay ahead on my mortgage?

Yes, but do it carefully and keep records.

Paying ahead on a mortgage is usually a good idea. It will save considerable money in interest, build equity in your home and shorten your loan term. There are even some banks and mortgage companies that allow you to pay half your mortgage payment twice a month, instead of one full payment monthly.

Half-payment programs can be problematic. They work, but not as well or as economically as making 13 payments a year (instead of twelve). If you want to make the extra "full" payment, write your normal payment, then make a separate check for another full payment. Mark it clearly "Principal Only". Keep a copy and mail the original with your regular payment. If you do this faithfully on a 30-year mortgage, it will be paid off in about 23 years. A 15-year mortgage will be paid off in about 12 years.

Extra payments are strictly on a "volunteer" basis. If you need the extra money, you're not locked in to the extra mortgage payments. On half -pay or other programs, the payments are locked in and your credit may suffer if you miss one.

Which party does the real estate sales agent represent?

The real estate sales agent represents the seller of the property, not the buyer. They are required by law to tell you this, even if it's just in the contract fine print. Most importantly, don't expect the agent to effectively negotiate the price for you. The higher the price of the property, the more commission the agent earns.

When does shopping for the best mortgage interest rate help?

After you narrow the field to two or three candidates, rate shopping makes a bit more sense. The best rate in the world is useless if the loan doesn't close in a timely manner.

Low-balling, that is, quoting a lower than actual rate to get your business, is unfortunately a common practice in the mortgage industry. Don't rely on a quoted rate unless the lender is willing to lock it in. Certain rates, unless instantly locked, change daily. If you get a 7% quote on the phone today, you just can't "take it to the bank." You may still be 30-60 days from actually closing the loan because of the required processing. Rate quotes are based on clean credit. Prime rates go to prime applicants.

Finally, remember that a locked rate is not a mortgage commitment. It simply reserves an interest rate for a set period of time.

You've gone through the procedure for selection, you're happy with the company, the loan officer and you've locked the loan rate...what's the next step?

Have your loan officer outline the processing steps and the estimated time frame of each stage. Make sure you provide him with everything he needs in a timely fashion and follow the loan process to keep the application moving forward. (If the loan doesn't close before the rate lock expires-usually 60 days- your rate will revert to the market rate, which is likely to be higher.)

How long will the process take?

The whole procedure, if everything goes smoothly, should take from 4-6 weeks. If the process takes longer, credit reports, appraisals and other documents will expire and need to be renewed before the loan can close. Most likely this will be at your expense. The longer a loan process takes, the more likely things can go wrong.

If I have a problem with a mortgage lender, where can I turn?

There are a number of state and federal agencies concerned with regulating real estate sales, transactions and mortgages:

State Agencies

Contact your state consumer protection offices, the Better Business Bureau and offices of the attorney general. There is also usually a state agency directly responsible for complaints against mortgage companies.

Federal Agencies

Mortgage Companies:

The Division of Credit Practices
Bureau of Consumer Protection
Federal Trade Commission
601 Pennsylvania Avenue, NW
Washington, DC 20580
Phone: 202-326-3224

Federally insured savings and loan institutions and federally chartered banks:

Office of Thrift Supervisions
1700 G Street, NW
Washington, DC 20552
Phone: 202-906-6000

State member banks of the Federal Reserve System:

Division of Consumer and Community Affairs
Board of Governors of the Federal Reserve System
20th and Constitution Avenue
Washington, DC 20551
Phone: 202-452-3946