(This is Part 3 of a three-part series. See Part 1: Why shop for a real estate loan online? and Part 2: Which real estate lender Web sites are worth shopping?)
In previous columns, I discussed some of the advantages of shopping for a mortgage online, and identified the best sites. In this one, I discuss how to do it.
1. Decide Whether You Are a Shopper: Online shopping is not for those who are computer-phobic or mortgage-allergic. If you feel overwhelmed by the complexity of mortgages, and don’t have the time, energy or desire to educate yourself about them, Internet shopping is not for you. Select an Upfront Mortgage Broker (UMB) to shop for you.
2. Determine Whether You Qualify For online Shopping: You can’t shop online unless your particular deal is priced online by at least some lenders. If you have a credit score below 620, most of the sites will deal with you, but offline – “Bad credit? Call us”
Online shoppers also do best if they can fully document their income and assets. Only four of the 17 sites I list have a “stated income” option under which the lender verifies the source but not the amount of income. None price “no-doc” loans online.
3. Decide the Mortgage Features You Want: You can’t compare prices of different loan providers accurately unless you can specify exactly what you are shopping for. When you shop for an automobile, you decide beforehand that you want, e.g., a 4-door Toyota Corolla with Bose speaker system 102, red trim, etc., etc. Similarly, when you shop for a mortgage, you must know the type of mortgage you want – whether fixed-rate (FRM) or adjustable-rate (ARM), and if the latter, what kind. You must also know your preferred term, points, down payment, lock period and options, including interest-only, prepayment penalty and waiver of escrows.
I have articles on all these topics on my Web site, but to make it more manageable for shoppers I recently added a “Tutorial on How to Select Mortgage Features.”
4. Identify Sites That Price Loans With the Features You Want. I have done most of the spadework for you by developing tables that show the loan coverage of the 17 sites.
Suppose, for example, you want a 10-year FRM with zero down. The tables show that lenders 2, 3, 7, 9, 10 and 13 price 10-year FRMs, but of this group, only 2, 3 and 13 also price loans with down payments of less than 5 percent. Hence, you can concentrate on these three sites.
5. Comparing Prices of FRMs at Different Sites. In pricing an FRM, you must consider the rate, points and all other lender fees. Suppose you are seeking the best deal on the 10-year FRM from lenders 2, 3 and 13:
a. At lender 2’s site, find the rate that is closest to the number of points you previously decided you wanted to pay.
b. Calculate the dollar value of these points and add it to the lender’s fixed-dollar fees to get total fees of lender 2 for that rate.
c. Go to lenders 3 and 13 and repeat the process for the same rate. Since lenders usually quote rates in increments of 1/8 percent, you should be able to find the exact same rate.
d. Holding the rate constant at the 3 sites, the best deal is the one with the lowest total fees.
6. Comparing Prices of ARMs: On ARMs with initial rate periods of 3, 5, 7 or 10 years, follow the same procedure. If you are 99 percent confident you will be out of the house before the end of the initial rate period, take the ARM with the lowest total fees at the same rate.
If you are not sure that you will be out before the end of the initial rate period, you should consider what might happen to the rate at that time. That will depend on the rate index, margin and rate caps, which may differ between lenders.
It could turn out, for example, that the 5-year ARM with the lowest cost over five years leaves you more exposed to higher interest rates after five years. In that event, you need to decide whether the cost saving is worth the added risk. How to make this judgment is discussed in more detail in my tutorial.
Borrowers who opt for an ARM with an initial rate period of 12 months or less can use much the same technique, but instead of comparing the initial rate, they should compare the index plus margin. At the end of the short initial rate period, the rate is reset at index plus margin, subject to any caps.
If two ARMs are identical but you had to call one lender to obtain information on the margin or caps, select the other.
The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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