Rates, points, APRs, insurances, origination fees, discount fees, third party fees, processing fees… no doubt, there are a lot of costs associated with obtaining a mortgage. Ironically, regulatory reform meant to help consumers and protect them from the industry “bad guys” had some unintended consequences, like higher costs. And for every new regulation, the “bad guys” find new ways to play the nut-and-shell game of hiding bloated mortgage costs in their quotes. Makes me think of the words from one of my favorite guitar players, Jimi Hendrix: “Is this love baby, or is it just confusion?”
According to the Mortgage Bankers Association, the cost to originate a loan has increased by 57% over the past two years. So, how does a consumer know if they are getting a fair deal? Here are the top five questions your mortgage lender should be willing to answer (If they can’t or won’t, then seek help elsewhere!).
Many lenders still rely on a closing cost worksheet to provide prospective applicants an initial glimpse at costs. These can be helpful tools in comparing lenders prior to making an actual application; however, there are no regulations governing these forms. Until you have made application and received a formal Good Faith Estimate, the numbers can change. The Good Faith Estimate form is required to show specifically-defined lender fees in Box A.
Even after you’ve received a Good Faith Estimate, lenders are only accountable for the accuracy of certain fees. For example, there is no tolerance requirement for real estate taxes. So a lender that has higher origination fees can make their bottom line settlement charges look lower by sandbagging the cost of taxes without repercussion, and sell the consumer on the fact that their overall settlement costs are lower.
To paraphrase Benjamin Franklin, “The only thing certain in life is death and taxes.” So if you are comparing lenders, be sure that things that are a “given” in the transaction (like taxes) are the same; otherwise you will be making a decision on false pretenses.
2. What is Your APR?
The Annual Percentage Rate, or APR, is the total cost of the mortgage, including upfront fees, over the life of the loan; it is expressed in terms of an overall interest rate. The higher the upfront costs, the higher the APR. When you obtain the APR from a lender for your specific loan request, you can truly compare apples to apples when shopping around. If you are quoted an APR up front and later see a higher APR in the formal Truth-In-Lending disclosure during the application, be sure to ask the lender why it changed.
3. Can You Put it in Writing?
More specifically, “can you provide me a Rate Lock Agreement guaranteeing my rate?” Interest rates change on a daily basis and until the lender has agreed to lock in your interest rate, you are subject to market movements. Even if a rate is disclosed on a GFE or Truth in Lending Statement, it does not necessarily mean that you are guaranteed that interest rate. A Rate Lock Agreement shows whether your interest rate is locked, what rate and points you are locked in at, and for what period of time.
4. What Are Your Adjustable Rate Options?
With fixed rates at historical lows, why would anybody want an adjustable rate mortgage (ARM)? The answer is savings. ARMs have historically outperformed their fixed rate counterparts, saving homeowners thousands of dollars over the life of their loan and/or allowing them to more rapidly build up equity. Check out this article which might make you rethink the 30-year fixed-rate mortgage.
The Federal Reserve Board also offers information in its Consumer Handbook on Adjustable Rate Mortgages.
So why would a “bad” lender not want you to ask about ARMs? Because they may not be knowledgeable enough to give you good advice; the fixed-rate product may be all they know. An ARM comes with some risk, but when you take calculated risks and rely on historical information to make decisions, there can be great reward.
5. Can I Meet You Face-to-Face?
The most basic principle of sound decision making: know who you are dealing with. Although the National Mortgage Licensing System has improved the quality of loan originators, it is still not that tough to be licensed. There are still plenty of part-time loan officers and people recruited from right out of school to fill mortgage call centers. When I’m preparing for what is likely the biggest financial decision of my life, I don’t want a kid who was flipping burgers last week to be taking my “loan order” over the telephone.
There are a number of advantages to meeting with a professional mortgage consultant:
- If there is a co-borrower, you can meet and get all the information together
- You can get professional explanation of all the forms and get questions answered
- It tends to eliminate confusion in the process
- It will be easier for you to identify any potential bait-and-switch tactics
It is important to not only know and trust the company you are dealing with, but also the person who is going to be taking care of you along the way.