(This is Part 1 of a three-part series. See Part 2: Which real estate lender Web sites are worth shopping? and Part 3: Best way to shop for real estate loan online.)
This is the first of three articles on the why, which and how of shopping for a mortgage online: why seek a mortgage this way, which sites are the best, and how do you shop effectively?
Shopping for a mortgage online involves finding the best price among the single-lender Web sites that price your mortgage. Online mortgage shopping is not for everyone, as discussed in the last article of this series, but for those properly equipped, it offers numerous advantages.
Online Prices Are Easier to Find and to Shop: If your loan is priced on a Web site, it will be relatively easy to find, and to compare to the quotes on other sites. In contrast, price quotes in the hard-copy media are never provided in the detail required by most shoppers, and are always out of date. Telephone and e-mail quotes by brokers and loan officers are unlikely to apply to the specifics of your deal, and may not be given in good faith.
Online Pricing Is Often Better: Lenders acquiring loans through their Web sites avoid the costs of maintaining retail lending facilities, including the commissions paid to loan officers. Because of competition among online lenders, the cost savings are generally passed on to borrowers.
Price Volatility Is Easier to Manage: The mortgage market is highly volatile. Lenders reset their prices every morning, and sometimes during the day. Price quotations from different loan providers are not comparable unless they are obtained at about the same point in time.
This is a major problem in offline shopping because it takes so long to obtain reliable price data. It is not a problem in online shopping because online price quotations can be accessed quickly.
You Avoid Price “Low-Ballers”: These are loan providers who ensnare customers by quoting low prices they have no intention of delivering. The client is informed that the price will be locked at the “market price” on the lock day, but the market price is what the low-baller says it is. Invariably, the lock price is higher than the price quoted to a shopper for the identical loan at the same time.
Online shoppers are not vulnerable to price low-balling because they can check their price online on the lock day. An online lender cannot quote different prices to shoppers and lockers.
You Avoid Third-Party Settlement Cost Abuses: Early in the process, some loan providers attempt to ensnare customers by low-balling third-party settlement costs, which are “estimates” they can’t be held to. At closing, in contrast, some loan providers mark up third-party charges in order to pocket the difference.
These practices work offline because transaction-specific cost data are not available at an early stage. Lenders need not provide the Good Faith Estimate of settlement costs (GFE) until three business days after receiving the loan application, at which point most borrowers are committed. Even if they are not committed, the only way to obtain more than one GFE is to apply to more than one loan provider, which is time-consuming and duplicitous.
In contrast, online shoppers can easily collect settlement cost information from multiple lenders at the same time they are shopping lender prices. Having multiple estimates is an excellent defense against low-balling or markups.
You Avoid Lender-Fee Low-Balling: Some lenders low-ball their own fees, which under the rules are also considered “estimates.” While points, which are charges expressed as a percent of the loan amount, are included in a price lock, fees specified in dollars are not. Some lenders deliberately inflate these fees as the borrower moves closer to closing. Home purchasers are the most vulnerable because they can lose the home if they don’t close on time.
This is not a hazard to online shoppers, however, because the shopping sites clearly identify their fees and many of them guarantee them. While others don’t explicitly guarantee their fees, displaying them online is almost as good, since the lender would have no way to defend a different number at the closing table.
You Avoid Being Scammed When You Change Your Mind: Shoppers often change their mind about the deal. For example, they decide to switch from a 30-year FRM to a 5-1 ARM, pay points to lower the rate, make a larger down payment, waive escrows, etc. If an offline loan provider figures that a customer is committed, the price of the new deal may be higher than the price that would be quoted to a new shopper. This cannot be done to online shoppers who can check the price of new loans online.
Next week: The best sites to shop.
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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