So what really is the best way to shop for a mortgage?
Some people (ala famous Atlanta consumer guru) say to start by getting three quotes; while this is fairly good advice, this strategy often leaves people dazed and confused trying to compare multiple good faith estimates each with sometimes different loan amounts, different mortgage types, quoted on different days of the week (mortgage rates can change every day), with points, with no-points, 1% origination fee, no origination fee, 15 day lock-in, 30 day lock-in, etc, etc. There is a better way, I promise.
You could do some independent research — you could look at the Sunday-Mortgage finder in the newspaper or visit “fake-rate.com” (the name has been changed to protect the not-so-innocent) where most lenders quote rates with HIGH upfront discount points so they can quote LOW below market interest rates, and where some lenders just flat out lie about rates to make the phone ring. If you don’t believe me (and if you have more free-time than you care to admit), make some phone calls off the info in the paper and I am sure you will hear at least one, “Well, sir, those rates from Sunday have to be turned in to the newspaper early . . . and since then the rates have moved up, but I could offer you . . . ” You get the point.
Or you could get some advice from your family — you could call and talk to your friend’s mother who used to be in Real Estate who has a friend who does mortgages part-time (you laugh, but you’d be surprised).
Or you could do it the right way . . . and here is my advice.
1. Start with someone you trust and someone who knows what they are doing — preferably someone that has been recommended to you either by a friend, a co-worker or your Realtor. If you don’t know anyone personally, use your first contact/phone call to make sure that you are working with an experienced, trustworthy, full-time, mortgage professional. Don’t worry about interest rates or good faith estimates (yet). I’ll get to that.
Here a few questions you can ask to test the professional from the part-timer:
Q1: What are mortgage interest rates based on?
A1: The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. You don’t want to work with someone who is watching the wrong indicators.
Q2: What is the next economic report or event that could cause interest rate movement?
A2: A professional will have this at their fingertips. For an up-to-date calendar of weekly economic reports and events that may cause rates to fluctuate, visit http://www.hillsidelending.com/mmg_jp.htm and click the green MMG Weekly banner.
Q3: When the Feds “change rates”, what does this mean . . . and what impact does this have on mortgage interest rates?
A3: The answer may surprise you. When the Fed makes a move, they are changing a rate called the “Fed Funds Rate”. This is a very short-term rate that impacts credit cards, credit lines, auto loans, etc. Mortgage rates most often will actually move in the opposite direction as the Fed change, due to the dynamics within the financial markets.
Q4: What is happening in the market today and what do you see in the near future?
A4: If the person that you are talking with cannot explain how Mortgage Bonds and interest rates are moving at the present time, as well as what is coming up in the near future, you are talking with someone who is still reading last week’s newspaper, and probably not a professional with whom to entrust your home mortgage financing.
Assuming that you have now found a professional that you can trust (and someone who you like, who is honest, and who is responsive, etc.), here is how to go about “shopping for the mortgage.” The first step in the process is to get prequalified, for time’s sake, for the sake of your credit score and for the sake of your sanity, you should do this once. Before you start, make sure that you will be allowed to have a complete copy of your credit report including your credit scores. Most mortgage people do NOT want you to have this information in full — because they are afraid that you will use it to SHOP them!! The law requires that you be informed of your credit scores (although mortgage companies are not required to give you a copy of your credit report).
During the prequalification process you should be given different financing options and scenarios that match-up well with your qualifications, your credit, your downpayment objectives, your price-range and your target monthly payments. Remember, this is probably the largest, single investment that you will make, you should be getting trustworthy advice from a professional. At the end of this process you should feel fully informed about the process, about different programs and interest rates, different downpayment options, first and second combo mortgages, etc. If you aren’t offered a good faith estimate — run! (just kidding) — ask them to send you one based on the loan option that you are most leaning towards.
Now that you know your options and your price range, you can shop for a house. Because you are prequalified, when you are ready to make an offer on a house, you should be a able to get something in writing stating that you are a legitimate, qualified purchaser.
So what about getting three quotes?
Here is the thing . . . when shopping for a mortgage, you are not able to lock-in (or protect) your interest rate until you have an accepted contract on a new house. Essentially, you can’t “buy” a mortgage until you have a house under contract, so why drive yourself crazy shopping before you are ready. Getting three quotes at the BEGINNING of the process would be like going to three car dealerships, test driving the same car at all three lots, negotiating the price at all three lots and then politely telling each salesperson, “Thank you, I just wanted to see if I liked the Camry.”
The day you have an accepted contract is the day to shop for a mortgage.
The person that you have worked with since the beginning of the process is the first place to start. Now that you have a contract, with a specific price and closing date, you should be able to revisit your loan options and get an updated good faith estimate based on that day’s available interest rates. If you followed the first step, your loan officer should be able to give you advice on the market trends, on interest rate volatility and on whether or not today is a good day to lock-in on your mortgage rate. Now that you have a concrete option, it’s time to get your second and third quotes. To compare them fairly, you need to get estimates based on the same loan program and same loan amount on the SAME DAY. Because interest rates change every day, comparing one option on a Monday and the next on a Wednesday won’t necessarily help you find the best deal. Plus, if you are a hot-lead, ready to lock your rate, if you can’t get a good faith estimate from someone within a few hours, then they really don’t want your business that badly anyways. Compare interest rates and closing costs (ignore the prepaid expenses — they will be the same regardless of who you use for your mortgage financing).
Now you are ready and armed to get your mortgage. Based on all the information that you have gathered, take the option that gives you the best combination of RATE, CLOSING COSTS, and SERVICE/EXPERTISE. Most of the time, the person who you trust, who comes highly recommended, who has worked with you through the entire process (and who needs to take great care of you to keep his or her referral partner happy) is a much better choice than the internet-telephone-loan-rep who has little to no motivation to keep you happy, but who is going to save you $100 in closing costs. And, if it is really that close, send the good faith to the person you would prefer to use and be honest . . . tell them that you would like for them to do the loan, if they can make the numbers work.
Good luck shopping!
Check out www.hillsidelending.com for today’s interest rates, to request a good faith estimate or for my contact information to start the process.