In my previous post, we discussed some of the first steps in getting a mortgage loan. This post will focus on online lenders.
Frankly, the loan process was confusing as hell, especially to a first-time home buyer. Hopefully my series of posts will help reduce some of your anxiety and point out some mistakes not to make.
The Process of Online Loan Applications
I submitted my loan reapplication criteria through Costco’s website. This collates basic data such as the amount that you plan to borrow, the type of loan, the cost of the property, and your estimated credit score. A list of vendors approved by Costco will be available with basic estimates on the rate that they typically offer for the life of your loan. You can then choose which lenders to contact, and you will eventually be contacted by these lenders both by e-mail and by phone.
Bankrate.com also has sponsors who offer very competitive rates. I submitted a few test requests as well. Note: submission of this generic information does not constitute an application.
The centralized process to receive bids through online lenders makes it easy to compare quotes. At first glance, the online rates were significantly better than what my local lenders offered. For instance, one of my local lenders offered a rate of 3.125% on a conventional 15 year loan while most of the online lenders offered rates around 3% or less. Obviously this is a relatively small difference, but it is clear that online lenders are more willing to offer lower interest rates even without any negotiation. This is an important point, as there is no free lunch. Realizing this was the first step in figuring out who was actually giving you a better deal long term.
The unfortunate result of having so many bids is that you will be swamped with calls. I believe I submitted my contact information to about 5 lenders, and ultimately received over 15 calls in one day. This was during business hours on a weekday—I obviously had no time to return most of the calls.
Even though borrowers often focus on interest rates, there are a number of other factors that are critical in making a loan decision. Unfortunately, there is little standardization among lenders. After preliminary discussions with many of the lenders, including my local ones, the terminology used by each of them was confusing in that it was not easy comparing the details.
Understand the terminology.
It is challenging to learn the terminology on short notice, especially if you have already found a house that you are interested in buying. There are plenty of real estate books available in the library that you can peruse before you delve into the home buying process, but here are a few critical terms that I found helpful in understanding:
- Interest rate. Realize that the interest rates quoted may not necessarily be the same as the annual percentage rate (APR). As your interest accumulates in your loan, the amounts compound. Hence, the APR is what you will actually pay over the long term.
- Points. As someone who is rarely involved in debt accumulation, I was ignorant about what points were. As with stock market points, each point typically represents a certain percentage of the entire sum. In real estate, one point represents 1% of your loan amount. These “points” are often used to settle on a lower interest rate. For instance, a lender may offer you a loan at 3.5%, but if you “buy” a point, they may be able to knock down the rate to 3.1%. In essence, points are means to “buy into a lower” interest rate. Obviously you’d have to do the math to determine whether the points are worth it, but the first time I learned about this concept I was fascinated.
- Origination fees. Closing fees. Lender fees. Very confusing. Some lenders have “no fees”. Otherwise will have various fees tacked onto the closing statement. Make sure you understand where the charges are coming from. This portion of your loan will likely have the most variability among lenders.
- Closing costs. Some costs such as appraisal fees, title fees, and various escrow amounts are unavoidable. Some of these fees are mandated by the loan company. What I didn’t know initially was that you can still bargain for better deals. One example are the title fees. You can shop around for title companies and negotiate for the lowest bidder. Is it worth your time? I don’t know. My real estate agent worked with a title company who handled escrow accounts to hold onto earnest money for potential buyers. It turned out that I was also deep into contract with the seller and title company before I realized that I could actually shop around for a title company. Would I have saved more if I had looked? Most likely. Would it have been worth the hassle? It might not.
Stay tuned for the next installment where I discuss online vs local lenders in more detail.
(Photo courtesy of Flickr)