Where to Shop for Your Loan

Just as in other areas of homebuying, I believe the consumer too often is badly served when shopping for the best loan. There is much misleading lender advertising being printed and broadcast in every state. Even worse, there are many people in the mortgage loan industry whose training does not qualify them to advise the borrower—yet they presume to do so. Many are just sufficiently experienced to fill out application forms, and often don't know when the loan they are offering is unsuited to the borrower's needs.

Your best recourse is to find a trust worthy advocate, a professional whose integrity and knowledge you can rely on. But where do you find such an ally? Well, first, let me endorse here what most people discover through life experience: Good ideas often take awhile to catch on. Here are two.

Models of Service Worth Every Borrower's Attention

One innovative service I can endorse is Loan Search, a company that offers solid and much needed assistance to mortgage shoppers. This service, located in Upper Montclair, New Jersey (1-800-591-3279),covers that part of the eastern sea board, and provides mortgage shoppers with valuable information—free! In a truly equitable marketplace this quality and type of service would be available every-where, to all home loan seekers.

Loan Search searches its own database of 20-plus lenders and finds the lowest-cost financing based on each borrower's circumstances and objectives, then directs the borrower to the most suitable loans. The search is completed in the course of a 5 to 10-minute phone call and, in most cases, the caller gets an instant "best loan"quote. The service provides full disclosure of lenders' fees, rates,and terms, explains other relevant features of various loans, and reveals lenders' hidden fees. Perhaps the most valuable part of all this is that the company matches the loan to the individual borrower, without sales pressure of any kind, or quotas to fill. The company will even put its quotes in writing (in plain English), along with providing amortization tables that enable you to compare different loans. What's more. Loan Search's service is courteous and efficient. The phones are staffed by real people (no voice mail loops)and the service offers Sunday hours. The company's website is www.loansearch.com.

If you don't have such a service in your locality—and it's a good bet you don't—you still have an alternative. A similar service with a lot to recommend it is offered by HSH Associates, located in Butler, New Jersey, the nation's largest publisher of mortgage information. Its Mortgage Report (interest rates, terms, fees, etc.) is accurate and always current, and is available for $20 (plus $3 ship-ping and handling). That fee will get you The Homebuyer's Mortgage Kit.

In the kit is a copy of How to Shop for Your Mortgage, a 56-page booklet ,highly recommend, and a Mortgage Report that lists loansoffered by 24 to 80 lenders in your area (1-800-UPDATES). Reports cover all areas of the United States and are thorough and easy to read. HSH also offers a number of other worth while products, including the Mortgage Report alone via email (minus the 56-page booklet) for $11. Finally, the company has an excellent website filled with valuable information and many useful links. It is well worth numerous visits: www.hsh.com.

 

Banks, Mortgage Companies, and S&Ls

When shopping for a mortgage your goal should be to find a loan professional with competence and integrity. That person may be working at your local bank, or may be a mortgage broker or mortgage company representative. However, I do not recommend that you simply walk into your nearest bank and accept the first loan product you are offered. Your responsibility to yourself is answered only by your being discriminating, by assessing and comparing different loans, different lenders, different sources. To do that well, you'll first need a sturdy notebook, as you'll want to record names and contact numbers and clear details of loans, right from the start of your search.

When you use a mortgage search service like Loan Search or HSH Associates (see Resources section) you certainly gain a headstart. But if you decide to begin by checking on loans offered by local banks, it is prudent to avoid dealing with the least experienced loan officer or clerk, which may well be the person staffing the loan desk. A talk, first, with the manager could be more rewarding, perhaps even saving you from the wrong loan, or from an unjustified disapproval. Ask to deal with a loan officer with more than a few months experience, someone who has handled loans for a sizable number of borrowers. Then, when you meet this person, weigh up whether your styles and personalities gel. If not, the better decisionis to go elsewhere. Also, while it is true that many banks do not routinely charge a loan origination fee, unlike many mortgage brokers and mortgage companies, that gain—and more—can quickly be wiped out by an inexperienced bank employee. (The origination fee,when it is charged, is usually 1 percent of the loan amount.)

Note: Inexperienced and uninformed sales people do not just work in banks; mortgage companies have their share also, so stay constantly cautious.

A good mortgage broker can save you not just the personal time it takes to shop around, but often, too, a chunk of money That depends, here again, on competence, not to mention integrity. Most brokers will do their best to get you the loan that is right for your circumstances, but it is still smart to assess brokers individually.Their commissions are higher on some loans than on others, which creates a temptation to push these loans even when they might not suit a particular buyer, or might not be the least expensive loan available.

When you interview a broker, ask these questions: How many loans has the broker placed in the past year? What percentage of the broker's loans are approved (look for 90%+)? What types of loans does the broker specialize in? How is the broker paid—commission taken from the fees you pay at closing, or with a separate fee paid by you? Are there recent clients you can talk with for references? Are there recent loans placed for clients whose situations resemble yours? For many borrowers an honest, up-front, hard-working mortgage broker is a blessing. This is especially true if your employment, credit history, or current financial situation make a loan hard to get. The best mortgage brokers offer quality advice, and can solve problems your bank or mortgage company may not be able—or even willing—to tackle.

At S&Ls and savings banks, loan applications and processing are usually handled by salaried employees. But here, too, you'llneed to be diligent in your approach and questioning. If you find your specific questions are being carried to someone in an inner office for answers, ask to deal directly with that person, rather than with the messenger.

Obtaining a loan from the bigger banks requires extra caution. They often have their own subsidiary mortgage companies where you are likely to find yourself dealing with commissioned reps.You'll need to ask all the interview questions we've already looked at, those that apply to bank loan officers and mortgage brokers, and perhaps a few more! Does the rep make a higher commission on certain types of loans (maybe a type not right for you)? Are the rep's personal commissions higher for loans made above a certain interest rate? In other words, are there salary incentives for the rep to get the most out of you? You need to know.

What you require and are searching for is someone who will place your best interests first, someone who has the experience and competence to follow through and get you the best loan possible.That frequently comes down to personal integrity, expertise, and the bond you establish with a particular loan professional.

By the time you are ready to get down to the serious business of making a formal loan application you will have talked with a num-ber of lenders or brokers, at least by phone. And you will have a good idea of the loans and rates being offered in the market place.This preparation is invaluable, and it doesn't all have to be done out on the street. If you have access to a computer you can check ratesand get reliable advice at a number of different websites, including a few of the best: www.hsh.com, www.freddiemac.com, and www.microsurf.com.

 

Pre-Payment Clauses

A number of lenders have recently taken to imposing pre-payment penalties on borrowers who pay off a loan ahead of schedule—as 95percent of buyers do. Some lenders have always imposed these penalties on ARMs paid off in the early years, but now a few banks and mortgage companies are planning to include these pre-payment penalty clauses on fixed-rate mortgages (FRMs).

The sting is that homeowners with such mortgages may have to pay 1 to 2 percent of the original loan amount, in some cases after being in the house for 5 or 10 or more years. My advice is simple:Before agreeing to anything, make sure the mortgage you are offered does not have such a clause (unless, of course, you can accept it). When you find such a clause, ask the lender to remove it.If the answer is no, you may be well advised to refuse the loan. The last thing you need is having to hand your lender another big chunk of money when it comes time to sell.

Note: This type of penalty is aimed at homeowners who pay off a mortgage when they move to another home, as most homeowners do within the first 10 years. Later we'll look at pre-payment penal ties that can affect borrowers who send in extra payments simply to get their loans paid off ahead of schedule (and save thousands of dollars in interest charges).

 

What You Need to Know About APR

No doubt you will have seen the term APR in lenders' ads and pamphlets. Something like this: Interest Rate 7.25%, APR 7.36%. Lendersare required to disclose and display the APR (Annual PercentageRate) for every loan, ARMs and FRMs. The objective is to help bor-rowers compare a variety of loans having differing rates, points, andfees, and arrive at a 'true rate' for each. On a surface level it seemsto achieve that goal, but underneath it is often a misleading andinadequate measure.

APR is always a higher figure than the loan's interest rate because it takes into consideration the interest rate plus additional fees you will have to pre-pay (including points). All these fees are extras; they make the loan more expensive than the interest rate alone would have you believe, which is the problem APR is supposed to correct.

However one major shortcoming of APR is that it is calculated on the assumption that the borrower will hold the loan for its fullterm. So, if you take out a 30-year loan, the APR is accurate only if you hold the loan for that period. But, in fact, only about 5 percent of home loans run their full term. For all the rest, the 95 percent APR is invalid.

My best advice is to pay heed to APR initially only, when you are scanning lenders' offerings. But when you find particular loans you feel might interest you, dig deeper. Compare their interest rates along with estimates of all fees payable. Then, with the help of your lender, mortgage broker, attorney or exclusive buyer broker, workout total costs for each loan, for different periods of time. This is even more important the shorter the time you believe you might hold the loan. Tell your lender you'd like to see comparison figures that enable you to make accurate side-by-side evaluations. If your lender balks at such a request, move on; there are genuine profes-sionals out there who are willing to do this for you.