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October 23, 2000
"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 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.
Copyright Jack Guttentag 2002
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