A Better Mortgage

Rate Shopping?

Here is an article I often distribute to potential clients that are rate shopping. I don't deserve credit - save the applause for Sue Woodard of The Mortgage Market Guide. The information contained is timeless, and I thought it was worth sharing.

SHOPPING AROUND?

HERE’S THE INSIDE SCOOP ON HOW TO DO IT RIGHT!

First: make sure you are working with an experienced, professional loan officer. The largest financial transaction of your life is far too important to place into the hands of someone who is not capable of advising you properly and troubleshooting the issues that may arise along the way. But how can you tell?

Here are FOUR SIMPLE QUESTIONS YOUR LENDER ABSOLUTELY MUST BE ABLE TO ANSWER CORRECTLY. IF THEY DO NOT KNOW THE ANSWERS…RUN…DON’T WALK… RUN…TO A LENDER THAT DOES!

1) What are mortgage interest rates based on? (The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. DO NOT work with a lender who has their eyes on the wrong indicators.)

2) What is the next Economic Report or event that could cause interest rate movement? (A professional lender will have this at their fingertips. For an up-to-date calendar of weekly economic reports and events that may cause rates to fluctuate, visit www.timothyabbott.com and request the weekly economic update).

3) When Bernanke and the Fed “change rates”, what does this mean… and what impact does this have on mortgage interest rates? (The answer may surprise you. When the Fed makes a move, they can change a rate called the “Fed Funds Rate” or “Discount Rate”. These are both very short- term rates that impact credit cards, Home Equity credit lines, auto loans and the like. On the day of the Fed move, Mortgage rates most often will actually move in the opposite direction as the Fed change. This is due to the dynamics within the financial markets in response to inflation. For more information and explanation, just give us a call).

4) Do you have access to live, real time, mortgage bond quotes? (If a lender cannot explain how Mortgage Bonds and interest rates are moving in real time and warn you in advance of a costly intra-day price change, you are talking with someone who is still reading yesterday’s newspaper, and probably not a professional with whom to entrust your home mortgage financing. Would you work with a stockbroker who is only able to grab yesterday’s paper to tell you how a stock traded yesterday, but had no idea what the movement looks like at the present time and what market conditions could cause changes in the near future? No way!)

Be smart... Ask questions… Get answers

More than likely, this is one of the largest and most important financial transactions you will ever make. You might do this only four or five times in your entire life… but we do this every single day. It’s your home and your future. It’s our profession and our passion. We're ready to work for your best interest.

SHOPPING... PART 2

Once you are satisfied that you are working with a top-quality professional mortgage advisor, here are the rules and secrets you must know to “shop” effectively.

First, IF IT SEEMS TO GOOD TO BE TRUE, IT PROBABLY IS. But you didn’t really need us to tell you that, did you? Mortgage money and interest rates all come from the same places, and if something sounds really unbelievable, better ask a few more questions and find the hook. Is there a prepayment penalty? If the rate seems incredible, are there extra fees? What is the length of the lock-in? If fees are discounted, is it built into a higher interest rate?

Second, YOU GET WHAT YOU PAY FOR. If you are looking for the cheapest deal out there, understand that you are placing a hugely important process into the hands of the lowest bidder. Best case, expect very little advice, experience and personal service. Worst case, expect that you may not close at all. All too often, you don’t know until it’s too late that cheapest isn’t BEST. But if you want the cheapest quote – head on out to the Internet, and we wish you good luck. Just remember that if you’ve heard any horror stories from family members, friends or coworkers about missed closing dates, or big surprise changes at the last minute on interest rate or costs…these are often due to working with discount or internet lenders who may have a serious lack of experience. Most importantly, remember that the cheapest rate on the wrong strategy can cost you thousands more in the long run. This is the largest financial transaction most people will make in their lifetime. That being said – we are not the cheapest. Of course our rates and costs are very competitive, but we have also invested in the systems and team we need to ensure the top quality experience that you deserve.

Third, MAKE CORRECT COMPARISONS. When looking at estimates, don’t simply look at the bottom line. You absolutely must compare lender fees to lender fees, as these are the only ones that the lender controls. And make sure lender fees are not “hidden” down amongst the title or state fees. A lender is responsible for quoting other fees involved with a mortgage loan, but since they are third party fees – they are often under-quoted up front by a lender to make their bottom line appear lower, since they know that many consumers are not educated to NOT simply look at the bottom line! APR? Easily manipulated as well, and worthless as a tool of comparison.

Fourth, UNDERSTAND THAT INTEREST RATES AND CLOSING COSTS GO HAND IN HAND. This means that you can have any interest rate that you want – but you may pay more in costs if the rate is lower than the norm. On the other hand, you can pay discounted fees, reduced fees, or even no fees at all – but understand that this comes at the expense of a higher interest rate. Either of these balances might be right for you, or perhaps somewhere in between. It all depends on what your financial goals are. A professional lender will be able to offer the best advice and options in terms of the balance between interest rate and closing costs that correctly fits your personal goals.

Fifth, UNDERSTAND THAT INTEREST RATES CAN CHANGE DAILY, EVEN HOURLY. This means that if you are comparing lender rates and fees – this is a moving target on an hourly basis. For example, if you have two lenders that you just can’t decide between and want a quote from each – you must get this quote at the exact same time on the exact same day with the exact same terms or it will not be an accurate comparison. You also must know the length of the lock you are looking for, since longer rate locks typically have slightly higher rates.

Again, our advice to you is to be smart. Ask questions. Get answers.

As you can imagine, we wouldn’t be encouraging you to shop around if we weren’t pretty confident that we feel that we can give you a great value and serve you the very best.

Please call us with any further questions you may have at this time – we are ready to work for your best interest!

Interest rates...and why I'll never post them again!

Here are our interest rates:

Rate Sheet

There are many reasons why I don't post interest rates on line (with an exception as to when it offers educational significance). Out of the plethora of reasons, there are two that continue to remind me as to why I feel the this is the correct decision.

The first issue is due to market movement. The majority of lenders issue rate sheets between 9:30 am and 11:00 am EST on days when the bond market is open. By this point the market has usually settled into a trading range and lenders have established rates. Just like the stock market, the bond market can have extremely large swings. If the change is big enough, lenders will issue an intra-day reprice of interest rates.* Certain days will require intra-day repricing two or three times in addition to the initial rate sheet. Rather than provide inaccurate and outdated interest rates on my web site, I have found things to work significantly better by providing custom, up-to-the minute interest rate quotes to my clients who call.

The second issue is based on lack of knowledge. There are many different factors that determine the interest rate a client qualifies for. It has been my experience that often clients don't have the background and expertise in order to answer some of the necessary questions correctly without help from a professional. For argument's sake, let's assume that I have built a web site that will aggregate all of my rate sheets and publish them to the world at large. All a client must do is answer a series of questions and the web site will spit out the correct rate. Here is a problem and a scenario I run into quite frequently.

A prospective client calls me who was referred to me by a previous client. This prospective client tells me they are interested in a rate and term refinance (essentially refinancing just the amount they owe - they are not taking any additional cash at closing). As I start to ask additional questions I find out that the client is seeking to combine their existing mortgage and a Home Equity Line of Credit (HELOC). This is a very important factor. Lending guidelines state that if $1.00 was drawn against the HELOC in the past 12 months we must consider this a cash out refinance. It's true we are not taking cash out with this particular transaction, but the client has recently taken cash out in the form of a draw against a HELOC, and thus this new loan will be treated as a cash out. The difference in rates between a rate and term refinance and a cash out refinance? It can be as much as .25%!

In a nutshell, even if I made my interest rates available on line there is a degree of knowledge necessary in order to make sure every question is answered correctly.

Hopefully this helps you understand a bit more about the mortgage industry, how it works, and why I won't post rates on a regular basis. If you are interested in a completely hassle-free mortgage consultation and interest rate quote, please don't hesitate to call.

Have a great weekend!

*An aside to this point that isn't very important but I continually find interesting. When we get an email from a lender alerting us that there has been a chance in pricing it almost always reads one of two ways. It will say 'Pricing has IMPROVED' or 'Pricing has CHANGED.' Now, I may only be a mortgage professional, but I understand that when rates change intra-day they do one of two things. They IMPROVE or they WORSEN. These lenders can tell me that rates have been changed, modified, adjusted, rectified to reflect current market conditions etc. The bottom line is that if rates didn't improve then its bad news. Why can't they give it to me straight??

What's your rate?

As a mortgage professional, one of the most frequent questions I receive is 'What's your rate?" By far the majority of my clients are personal referrals and are very polite when I explain to them there are approximately 30 different things I need to know before I can accurately quote a rate. Please keep in mind this doesn't include any of the planning and strategy questions that ensure we are discussing rates for the right mortgage!!

If you are a number-phobic person you may want to skip the next document (or take a handful of Advil beforehand). Otherwise, please step into my world:

Today's Rates

If your heart is palpitating you should probably step away from the numbers. Or switch to decaf. Hey, I warned you. Take a couple of deep breaths and I will walk you through this step-by-step so that anyone can understand what you are reviewing.

This is our rate sheet for today. It's a pretty simple rate sheet but it does get much more complicated. We have one lender that has rate sheets that stretch over 14 pages. Legal sized. Fortunately no one faxes rate sheets anymore so the only trees being killed are virtual. In addition to our rate sheets, I have approximately 20 other rate sheets emailed to me daily. Sometimes we have the best rates and sometimes we don't. That's why it's great to be a mortgage banker AND a mortgage broker as we can place the loan with whomever has the best rates. We will save this discussion for another day. 

Let's examine what I have posted. The first two boxes are labeled '30 Yr Fixed' and '15 Yr Fixed.' Just to the right of these boxes there is a bigger box labeled as 'Pricing Adjustments.' As you can see there is a fairly lengthy list of adjustments. We have to account for the following factors:

• Loan to Value (LTV) and Combined Loan to Value (CLTV)
• Primary, Second, or Investment home
• The number of units
• Type of property (single family, multi-family, condo)
• Mortgage insurance
• Loan amount
• State
• Escrows (will you pay your taxes and insurance with the mortgage or on your own?)
• Type of income, asset, and employment documentation (full, reduced, stated, no doc)
• Is it a purchase or refinance?
• Is it a rate and term refinance or a cash out refinance?
• What does your credit look like?
• How many months of reserves can we verify?
• How long does our rate lock need to be (the shorter the lock the better the rate)?

This represents a lot of the information we need but by no means is exhaustive. Most lenders have standard adjustments for all of these items, but they are not identical. If I quote you a rate without gathering this information I am making a number of assumptions, and there are three possible outcomes.

First, I can make incorrect assumptions that are too conservative and quote you a rate that is higher than what you will qualify for. Second, I can make incorrect assumptions that are too aggressive and quote you a rate that is lower than what you actually qualify for. Third, I can make the correct assumptions by pure chance and quote you an accurate rate.

All three of these outcomes are unacceptable to me because I am a professional mortgage planner. I do not run my business through chance or guessing, nor do I want to risk an unpleasant client experience by quoting a rate that I cannot deliver.

The next time you are starting the mortgage process and checking on rates, please understand that your mortgage professional needs to spend some time and ask lots of questions in order to make sure they are providing you with the most accurate rates and terms. If they don't don't take this time, you might want to reconsider who you are working with. As always, I would be happy to provide you with a free mortgage consultation and ensure that you receive the best mortgage and best terms possible.