Why the Lack of Mortgage Shopping Information?
August 24, 1998
"Why is there no place to go to get reliable information on the lender offering the best mortgage deals?"
There are a bunch of reasons, but the most important one is that the home loan market is nichified -- segmented into an enormous number of market niches, and the lenders offering the "best deal" vary from niche to niche. Read What Market Niche Are You In?
To illustrate this, I recently shopped 9 national lenders for a 30-year 7% loan of $200,000 on a single-family property for purchase in Oregon. The first column below ranks the lenders by the amount of their upfront fees, from lowest to highest. Then I stipulated that the home was not going to be occupied by the borrower as a principal residence but would be rented out. In lender parlance, it became an "investor" loan. Only 4 of the 9 lenders made such loans, the fees charged by these lenders were significantly higher to compensate for the added risk, and the best deal was offered by a different lender – one who was next to the bottom in the base case.
In a third variant, I stipulated that not only was it an investor loan, but the property was a condominium instead of a single-family house. The same 4 lenders offered this loan, but the lender offering the best deal was different.
Finally, I indicated that I wanted the lender to "lock" the loan for 120 days rather than the 45 days that was assumed in the base case. A longer lock period increases risk to the lender that interest rates will rise before the loan closes, which would result in loss when they sold the loan. Only one of the 9 lenders would make this loan, and it was a lender that was not competitive in any of the 3 prior cases.
The bottom line is that different lenders offer the best deal in different market niches, and shopping is the only way to find out who offers the best deal on your loan. There is no practical way an information service could collect and process such information from lenders and keep it up to date.
Furthermore, the narrower the market niche into which a loan falls, the smaller the number of lenders who offer it at all. A borrower actually looking for an investor/condo loan with a 120-day lock, therefore, ought to divide the shopping into two phases, with phase one directed solely to identifying the lenders who offer that combination of features.
"Why is there no place to go to get reliable information on the lender offering the best mortgage deals?"
There are a bunch of reasons, but the most important one is that the home loan market is nichified -- segmented into an enormous number of market niches, and the lenders offering the "best deal" vary from niche to niche. Read What Market Niche Are You In?
To illustrate this, I recently shopped 9 national lenders for a 30-year 7% loan of $200,000 on a single-family property for purchase in Oregon. The first column below ranks the lenders by the amount of their upfront fees, from lowest to highest. Then I stipulated that the home was not going to be occupied by the borrower as a principal residence but would be rented out. In lender parlance, it became an "investor" loan. Only 4 of the 9 lenders made such loans, the fees charged by these lenders were significantly higher to compensate for the added risk, and the best deal was offered by a different lender – one who was next to the bottom in the base case.
In a third variant, I stipulated that not only was it an investor loan, but the property was a condominium instead of a single-family house. The same 4 lenders offered this loan, but the lender offering the best deal was different.
Finally, I indicated that I wanted the lender to "lock" the loan for 120 days rather than the 45 days that was assumed in the base case. A longer lock period increases risk to the lender that interest rates will rise before the loan closes, which would result in loss when they sold the loan. Only one of the 9 lenders would make this loan, and it was a lender that was not competitive in any of the 3 prior cases.
Lenders Offering the Lowest Price, Ranked From Lowest to Highest
| Base Loan | Investor | Investor/condo | Investor/condo/120 days |
| A | H | B | E |
| B | B | H | |
| C | A | A | |
| D | E | E | |
| E | |||
| F | |||
| G | |||
| H |
The bottom line is that different lenders offer the best deal in different market niches, and shopping is the only way to find out who offers the best deal on your loan. There is no practical way an information service could collect and process such information from lenders and keep it up to date.
Furthermore, the narrower the market niche into which a loan falls, the smaller the number of lenders who offer it at all. A borrower actually looking for an investor/condo loan with a 120-day lock, therefore, ought to divide the shopping into two phases, with phase one directed solely to identifying the lenders who offer that combination of features.