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September 19, 2005, Revised December 5, 2005,
Revised January 12, 2005
This article is on the why, which,
and how of shopping for a mortgage on-line: why seek a mortgage
this way, which sites are the best, and how do you shop
effectively?
Why Shop For a Mortgage On-Line?
Shopping for a mortgage on-line involves finding
the best price among the different single-lender web sites that price your
mortgage. On-line mortgage shopping offers numerous advantages.
On-Line Prices Are Easier to
Find and to Shop
If your loan is priced on a web
site, it will be 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required by most shoppers and are always out of date.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 email quotes
by brokers and loan officers cannot be relied on unless the borrower knows the
source and has good reason to believe it is trustworthy.
On-Line 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
on-line lenders, the cost savings are generally passed on to borrowers. Some
sites warn users to expect higher prices if they go off-line.
Price Volatility Is Easier to
Manage
The mortgage market is
highly volatile. Lenders reset their prices every morning, and sometimes during
the day. Unless price quotations from different loan providers are obtained at
about the same point in time, they are not comparable.
This is a major problem
in off-line shopping because it takes so long to obtain reliable price data. It
is not a problem in on-line shopping because on-line price quotations can be
quickly refreshed.
You Avoid Price "Low-Balling"
Low-ballers 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� prevailing at the time of the lock, 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.
On-line shoppers are not vulnerable to price
low-balling because they can check their price on-line on the lock day. An
on-line lender cannot quote different prices to shoppers and lockers.
You Avoid Third Party Settlement
Cost Low-Balling
Some loan providers
low-ball third party settlement costs, which they can�t be held to because they
are �estimates�. Sometimes they do the opposite, marking them up in order to
pocket the difference.
These practices usually work off-line, because
information on third party costs typically is not provided until the shopper
receives the Good Faith Estimate (GFE), which under the rules need not be given
them until 3 business days after the lender has received the loan application.
The only way to obtain more than one GFE as a check on the estimates is to apply
to more than one lender, which is tedious and time-consuming.
In contrast, on-line 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 included. 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
on-line 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 on-line is almost as good, since the lender would
have difficulty defending 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 off-line 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 an on-line shopper who can check the price
of the new loan on-line.
On-Line Shopping Versus Use of Lead Generators
It is
instructive to compare on-line shopping with getting a loan through a lead
generation site (LGS), such as Lending Tree. LGSs collect information about you,
and match it to up to 4 lenders who contact you to make offers. An advantage
over shopping single-lender sites is that you only have to enter your financial
information once. When you shop on-line, you must enter the information for each
site you shop. That is the only advantage of LGSs.
One problem with LGSs is
that they do not provide any way to deal with price volatility. If the lenders
contact you on different days, their prices are not comparable. Similarly, LGSs
do not protect you against low-balling of prices or lender-fees, markups on
third party settlement services, or over-charges when you change your mind about
the deal.
Yes, the lenders who come
to you through a LGS do compete for your loans, but that doesn�t mean that you
will win. They may be competing to see who gets the opportunity to scam you.
Which Single-Lender Web Sites Are Worth
Shopping?
Borrowers who shop for a
mortgage on-line, for any of the reasons noted above, should only spend time on
sites that price their loan. If a site doesn�t price the type of loan you want,
with the features you require, don�t bother with it. You are on-line to shop,
not to be seduced into making a phone call.
To help, I recently
scored 21 sites for the depth and comprehensiveness of the information provided
to shoppers. Of these, I considered 19 worth listing because they had some price
functionality and showed all settlement costs.
The two highest ranked sites,
www.Amerisave.com and
www.Eloan.com, meet all my requirements for the designation of
Upfront Mortgage Lender (UML).
Among other things, UMLs provide a summary of all the market niches priced by
the site, and disclose all the major features of their adjustable rate mortgages
(ARMs). The two runners-up,
www.mortgage.com (the site of ABN Amro), and
www.indymac.com, did neither, but they did cover many loan types and
market niches.
Here is the complete list
by score:
Amerisave.com (47)
Eloan.com (46)
Mortgage.com (42)
Indymac.com (37)
Greenpointmortgage.com (32)
Chasehomefinance.com (30)
Mortgage.etrade.com (29)
Charteronedirect.com (29)
Wamuhomeloans.com (26)
Bankofamerica.com (25)
Countrywide.com (25)
Citimortgage.com (24)
Ditech.com (20)
Wachovia.com (19)
WellsFargo.com\mortgage (19)
Gmacmortgage.com (14)
Homeloancenter.com (14)
Infoloan.com (12)
INGdirect.com (12).
THE SCORING
SYSTEM
A site with a higher
score is one that prices a larger number of potential transactions, and provides
shoppers with the information needed to make decisions. Here are some examples
of the scoring system I used:
Mortgage Types and Features
Priced by the Site
For every program they
price beyond 15 and 30-year fixed-rate conventional loans, a site receives 1
point. This includes different types of ARMs, balloon loans, and FHA/VA loans.
They also receive a point for disclosing each important ARM feature.
Down Payment Pricing
A site that allows the
user to enter the down payment receives 2 points, and an additional point if the
down payment can be less than 5%. If the site uses one down payment in all its
pricing, but tells the user what that assumption is, it receives 1 point.
Settlement Cost Disclosures
A site that shows all
settlement costs receives 1 point, another point if lender fees are segregated,
another point if lender fees are guaranteed, another point if the guarantee
includes the appraisal, another point if the guarantee includes the credit
report, and 2 additional points if it covers all third party fees.
Rate-Point Options
A site receives 1 point
if some of the mortgages are priced with multiple combinations of interest rate
and points, an additional point if rates are shown for negative points
(rebates), and a point if it explicitly prices no-cost loans.
Strengths in
Coverage
11 of the 19 listed sites
priced loans on second homes, loans on investment properties, and cash-out
refinances. Most sites also priced loans on 2, 3 and 4-unit properties, as well
as on condos. There were even 5 sites that priced loans on co-ops, and 3 that
priced loans on manufactured homes.
16 of 19 sites priced
loans with down payments specified by the shopper (rather than assumed by the
site), and in 9 cases down payments could be less than 5%. Most of the 9 allowed
zero down on at least some transactions.
18 of 19 sites provided
different combinations of interest rate and points on at least some programs,
and 14 included negative points (rebates).
All 19 sites showed total
settlement costs, 12 segregated lender fees, and 9 explicitly guaranteed lender
fees.
Weaknesses
in Coverage
While shoppers can find
every type of ARM offered on multiple sites, only Amerisave, ELoan and Chase Mortgage
(ranked number 5) disclose the index and its current value, the margin, and all
rate caps � information needed to make intelligent decisions. If you price an
ARM on any other site, you will have to contact them to fill in the blanks.
Except for Amerisave, ELoan and Indy Mac, the sites assume
your credit is excellent. Shoppers with scores
below 620 cannot yet shop effectively on-line.
On-line shoppers also do
best if they can fully document their income and assets. Only 5 sites have a
�stated income� option, and none offer �no docs�.
The complete scoring of
the 19 sites is shown in
Detailed Information on Single Lender Web Sites. While a lower-ranked
site has less coverage, there is always the possibility that it prices your loan
and a higher-ranked site does not.
www.countrywide.com, for example, ranked number 11 overall but it is the
only site that prices FHA and VA loans.
How Do You Shop On-Line?
Here are the steps in using
these sites effectively.
1. Decide Whether You Are a
Shopper
On-line 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 on-Line Shopping
You can�t shop on-line
unless your particular deal is priced on-line by at least some lenders. For the
most part, this excludes borrowers with poor credit. If you have a credit score
below 620, most of the sites will deal with you, but off-line � �Bad credit?
Call us�.
Single lender sites vary greatly in the extent of
their niche adjustments. The trick is to determine whether the questions posed
by a site have captured your particular niche adjustments. If you are buying a
two-family house, for example, and you are asked about �Type of Property� with
�Two-family house� one possible answer, then you know that they adjust for
that.
On-line shoppers also do best if they can fully
document their income and assets. Only 5 of the 19 sites have a �stated income�
option under which the lender verifies the source but not the amount of income.
None price �no-doc� loans.
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. Similarly, when you shop for a mortgage, you should know the
type of mortgage you want � whether fixed-rate (FRM) or adjustable rate (ARM),
and if the latter, what kind. You should 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 but to make
it more manageable for shoppers I recently added
Tutorial on
Selecting 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 19
sites. See Detailed Information
on Single Lender Web Sites.
For example, you want a
10-year FRM with zero down. The tables show that lenders 1, 2, 3, 7, 9, 10 and 13
offer 10-year FRMs, but of this group, only 1, 2, 3 and 13 also price loans with
down payments of less than 5%. Hence, you can concentrate on these four sites.
5.
Compare Multiple-Price Quotes From Different Sites
If you are selecting an FRM, you must consider
both rate and total lender costs, which includes points and all other lender
fees. Assuming you are seeking the best deal on the 10-year FRM from lenders 1, 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 the total lender fee for that rate.
c. Now
go to lenders 1, 3 and 13 and repeat the process for the same rate. Since lenders
usually quote rates in increments of 1/8%, you should be able to find the exact
same rate.
d. Holding
the rate constant at the 4 sites, the best deal is the one with the lowest total
lender 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% 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 5
years leaves you more exposed to higher interest rates after 5 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
Tutorial on
Selecting Mortgage Features.
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.
Copyright
Jack Guttentag 2006
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