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Column Delivered February 4, 2002
"I like the idea of shopping for a
mortgage on the internet, and the �referral sites� you mentioned in a recent
column seem like a good first step. Are they?"
To answer your question, I recently took a
hard looks at six sites that provide price information for a large number of
lenders and mortgage brokers: bankrate.com, bestrate.com,
compareinterestrates.com, domania.com, interest.com, and loanpage.com. The sites
don�t distinguish lenders from brokers and I will refer to them all as
"lenders".
Lenders pay for the privilege of posting
their mortgage prices on the net. In this respect, referral sites are similar to
newspapers, but they provide more information than newspapers. At least some of
the price information on referral sites, furthermore, is posted on the day the
user looks at the screen, whereas all price information in newspapers is
obsolete.
Referral sites provide a relatively small
amount of information about a large number of lenders. No one should select a
loan provider based solely on this information. The promise of referral sites is
that they will provide a list of low-price lenders, along with quick
entree to those lender�s own web sites. Step two of this strategy would be to
visit the web sites of each individual lender on the list to make a final
selection.
Only borrowers who generate "plain
vanilla" deals could find this a useful strategy. These are borrowers who
have good credit; are citizens or permanent resident aliens; can make a down
payment of 3-5%; have sufficient income, relative to housing expenses, to meet
qualification requirements; can document income and assets; are purchasing or
refinancing (with no cash taken out) a single-family detached house that is the
borrower�s permanent residence; will escrow taxes and insurance; and won�t
have a second mortgage on the house when the loan closes.
If you don�t meet all of these
specifications, the prices shown on referral sites won�t apply to you. It is
easy for unwary users to miss this because none of the referral sites spell out
all the assumptions underlying their prices.
You need not bother either if you are looking
for an adjustable rate mortgage (ARM). The referral sites just don�t provide
enough information about ARMs to bother with.
They do provide complete price information
about fixed-rate mortgages: the interest rate; points, an upfront charge
expressed as a percent of the loan amount; lender fees expressed in dollars; and
lock period, the number of days the lender is prepared to commit to the rate and
points. They also show the date when the prices were posted.
On December 18, 2001 I shopped one of the sites
for a 30-year fixed-rate mortgage in Pennsylvania. The site listed 19 lenders
but I threw out 4 that were dated prior to December 18. (Why a lender would pay
to be listed but not bother to keep prices current is a mystery no borrower
wants to solve).
I ranked the 15 sites by APR, a summary
measure of interest cost that takes account of some upfront charges as well as
the interest rate. It is an imperfect measure but good enough for this exercise.
I selected the 4 lender sites with lowest APR for a visit. All six referral
sites except one had links to the lenders� own sites.
I found that none of the four lenders with
the lowest APR showed their dollar fees on their own site! In addition, one loan
listed on the referral site at 6.75% and 0.25 points was shown on the lender�s
own site at 6.75% and 1.367 points. A second loan listed on the referral site at
7% and zero points was shown on the lender�s own site at 7.375% and zero
points.
I repeated this exercise with each of the
other 5 referral sites, with similar results. In all too many cases, the lenders
quoting the best prices on the referral sites were either quoting higher prices,
or were not providing complete information on their own sites.
I reluctantly concluded that referral sites
were largely a waste of time. The better strategy is to go directly to the sites
of loan providers. In future columns I�ll provide a road map of what to look
for, with some specific recommendations.
Copyright Jack Guttentag 2004
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