What Mistakes Do Mortgage Shoppers Make?
October 23, 2000, Revised June 30, 2006, Reviewed July 16, 2009,
Revised January 20, 2011
"I am about to shop the mortgage market. Can you give me a handy list of the mistakes I need to avoid?"
Here are some of the most widespread.
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. Read Can I Rely on Mortgage Price Quotes?
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.
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. Read Can I Avoid Mortgage Prices That Have Lapsed?
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 an investment, expect to pay more. Read What Market Niche Are You In?
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. Read Did You Pay For Insurance You Didn't Get?
Don’t be afraid to ask for written confirmation of the rate lock.
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.
You are protected against this if the lender prices loans on it web site, as Upfront Mortgage Lenders do. See What Is an Upfront Mortgage Lender? An alternative, if you are not dealing with a UML, is to measure the market change in the wholesale price of your mortgage between the date of your price quote and the lock date. You can use my wholesale price series for this, see Description of Wholesale Mortgage Price Data.
It is common for borrowers to shop the loan they think they want, then change their mind later in the process. For example:
You avoid this problem by dealing with a broker, in principle at least, because the astute broker will switch lenders when the borrower changes her mind if such a switch will lower the price. In practice, this may or may not happen because brokers deal with a small number of lenders and shopping them takes time.
"I am about to shop the mortgage market. Can you give me a handy list of the mistakes I need to avoid?"
Here are some of the most widespread.
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. Read Can I Rely on Mortgage Price Quotes?
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.
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. Read Can I Avoid Mortgage Prices That Have Lapsed?
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 an investment, expect to pay more. Read What Market Niche Are You In?
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. Read Did You Pay For Insurance You Didn't Get?
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.
You are protected against this if the lender prices loans on it web site, as Upfront Mortgage Lenders do. See What Is an Upfront Mortgage Lender? An alternative, if you are not dealing with a UML, is to measure the market change in the wholesale price of your mortgage between the date of your price quote and the lock date. You can use my wholesale price series for this, see Description of Wholesale Mortgage Price Data.
Change Your Mind About the Type of Loan You Want After Selecting the Loan Provider
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.
You avoid this problem by dealing with a broker, in principle at least, because the astute broker will switch lenders when the borrower changes her mind if such a switch will lower the price. In practice, this may or may not happen because brokers deal with a small number of lenders and shopping them takes time.
Change Your Mind About the Type of Loan You Want After Locking the Price
This can be a serious mistake because locking imposes a cost on the lender and locking a second time increases the cost. Most lenders faced with this situation will lock again at the higher of the prices prevailing on the first lock date and the second lock date. This will be costly to the borrower if rates have increased over that period. Read Locking the Mortgage Rate Has Become a Challenge.