Q: My wife and I will be purchasing a house at the end of the year and I have started looking at different mortgages and their interest rates.
It appears there are a wide range of interest rates for the same type of loan.
Is it always the best idea to go for the lowest rate possible or to go with a local company? The majority of the companies with the lowest rates are those that I have never heard of.
A: You’ve asked some really smart questions. So, let’s start at the top.
First, most loan officers in mortgage broker offices work with different end investors (the folks who buy the mortgage from the lender who gives the cash to you). Each investor offers different types of loans and interest rates. The rates are different because each end investor wants a different amount of profit for the use of its cash. Then, each individual mortgage lender tacks on its own fees and profit.
That’s why a 30-year fixed-rate loan could run you 6 percent with one lender and 6.75 percent with a different lender.
In addition, mortgage lenders today try to customize loan programs to the particular needs of each borrower. A 30-year fixed rate loan could be an “option payment” loan, where you decide how much you’ll pay each month, or it could be a straight 360-month principal and interest amortization. Different types of 30-year loans, for example, are structured in different way.
The best thing you can do before you sign up with any one lender is to do some serious shopping around. You should first decide which kind of loan is right for you: adjustable rate mortgage, fixed-rate mortgage, balloon payment, etc.
Then, talk to a credit union (if you belong to one or can join, they’re known for cheap loans), a local bank (that might portfolio loans and offer different loan programs with less stringent lending requirements), a national mortgage lender (like Countrywide, Bank of America, or Washington Mutual), a local mortgage broker (who is well-regarded) and then you should look online at one of the websites like eloan.com or lendingtree.com that aggregates the rates from dozens of lenders.
You can use one of my favorite websites, BankRate.com, as a search tool to give you an idea of what kind of mortgage rates are available in your city, and what kind of points you’ll have to pay.
Once you make your list of lenders, you should check them out. You might find that the lender you’ve never heard of has a slew of complaints filed against him, or you might find out that the company has a sterling reputation. But you won’t know until you do your homework.
Go to the Better Business Bureau (bbbonline.org) to see if any complaints have been filed against the company. Call your Attorney General’s office to see if there are any complaints or open investigations against the firm. Contact the agency of office that regulates mortgage lenders in your state to again check for complaints and to make sure the lender is licensed to do business in your area. You might also check out J.D. Power’s annual survey on mortgage lenders (JDPower.com).
While getting an inexpensive loan sounds good, you could come to regret it if you wind up with a company that provides poor customer service. Or you could get sucked into a scam known as the “bait and switch.” In this scam, you think you’re getting one rate, but when you actually get to the closing table, you find out that the rate isn’t really what you were promised — but the lender is counting on you being too annoyed or scared to walk away from the table.
Ask your real estate agent (if you’re working with one), family members, and friends to recommend loan officers they’d work with again. Be sure to read all the documents before you sign them. Once you find the lender you want to work with, and apply for the loan, don’t leave the office without a copy of your signed application and any other document you signed. In particular, make sure you get a copy of the good faith estimate, which itemizes all of your estimated costs for your loan.
Finally, remember this truism: If it sounds too good to be true, it probably is. So if one lender offers you a deal that’s significantly better than all the others, there’s probably something funny going on.