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Q:
I am about to shop the mortgage market. Can you give me a
handy list of the mistakes I need to avoid?
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A: Here are some of the worst.
Select The Loan Provider Offering The Best Price Over The
Telephone Or In The Newspaper
If you cast a wide net, you are bound to find a rogue who
will beat all the other prices, but has neither the capacity
nor the intention of delivering such prices. His objective
is to rope you in and move the process along until it is too
late for you to back out. At that point, he raises the price
using any of a dozen tricks available for that purpose.
Remember: Because the market is constantly changing, you
can't hold a broker or lender to a price quote until you
lock the prices. A lock is the lender's agreement
guaranteeing the prices.
Assume That You Can Shop Lender A Today And Lender B
Tomorrow
Because of market volatility, prices obtained on different
days are not comparable. Unless you shop all sources on the
same day, you are wasting your time.
Solicit Price Information Without Providing All The
Information About Your Loan That May Affect The Price
Prices vary with numerous borrower, property and transaction
characteristics that lenders believe affect their risk and
cost. These include loan size, credit rating, type of house,
your ability to document income and assets, etc.
Unless informed to the contrary, lenders quoting prices
assume a set of standard specifications that generates the
lowest price. If the specs on your loan differ at all, the
price will be higher.
For example, lenders assume you are purchasing a
single-family house as your permanent residence. If in fact
you are buying a condo, or the house is intended as a second
home, expect to pay more.
Accept a Mortgage Broker's Verbal Assurance That You Have
Been Locked With The Lender
Some brokers tell the borrower the price has been locked,
but don't lock with the lender. If interests rates don't
rise between the supposed lock date and the closing date,
the broker makes an extra profit. If interest rates spike
during that period, which is unlikely but always possible,
you're left holding the bag.
Don't be afraid to ask for written confirmation of the rate
lock.
Allow The Price To Float Without An Agreement With The
Loan Provider Regarding How The Price Will Be Determined At
Closing
Some borrowers elect to allow the price to "float" -- change
with the market -- until shortly before closing. Such
borrowers are told they will receive the "market price" at
the time they lock. Few loan providers, however, explain how
the market price is determined.
The market price at closing should be the price available if
the loan were delivered immediately. This is also the price
quoted to new customers electing to float on the day you
lock. Because the lock price is always higher than the float
price, floating should save you money if interest rates
don't rise.
The reality, however, is that in the absence of an agreement
to the contrary, the market price at closing is what the
loan provider says it is. And many say that it is the 30 or
45-day lock price, rather than the float price.
Assume That The Loan Provider Who Offers The Best Price
On One Type Of Loan Will Also Have The Best Price On Another
It is common for borrowers to shop the loan they think they
want, then change their mind later in the process. For
example:
*They begin thinking they want a fixed-rate loan, then
switch to an adjustable.
*They begin thinking they want a 30-year term, then switch
to 15-years.
*They begin thinking they want a zero-point loan, then
switch to 3 points.
Such switches may invalidate their shopping because the loan
provider with the best price in one loan category may not
have the best price in another.
One way to avoid this mistake is to retain an Upfront
Mortgage Broker (UMB) to shop for you.
Jack Guttentag is Professor of Finance Emeritus at the
Wharton School of the University of Pennsylvania. Visit the
Mortgage Professor's
web site for more answers
to commonly asked questions.
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