Shopping for a home loan but not sure who to trust or how to make sure you are getting a good deal? Are there even any honest lenders left?
And why isn’t the lowest interest rate always the best deal?
How Interest Rate Shoppers Sabotage Themselves
One of the biggest misconceptions borrowers have when it comes to how to compare lenders is that the one with the lowest advertised rate is always the best choice.
There are three major issues with this:
1. Advertised rates may not apply to your loan.
2. The true APR (and cost) could be a lot higher.
3. “Bait & switch” tactics are unfortunately still common, even among the biggest lenders.
Those who simply call around and demand to know, “What is your rate?” are simply setting themselves up for failure. No lenders or banks just have one rate. Each lender has an almost identical range of rates on offer. What you receive depends on how much they think they can get away with and the specifics of your individual circumstances and transaction.
How to Accurately Compare Lenders and Loan Programs
What borrowers fail to realize is that they really ought to be focused on shopping by APR not advertised interest rates. By law this figure is also required to be featured in ads. The APR reflects the real effective annual percentage rate when lender’s points and fees are included. Often you’ll find this number far higher. For example, a 3 percent rate with a 5 percent APR means that there are a lot of fees being charged by the lender and probably more money required at closing. In contrast, a 4 percent rate with a 4 percent APR means no fees and a loan that is actually cheaper.
Just to confuse things further, know that many loan officers sadly do not even understand this difference themselves, and you may actually be better off with the first example above if having the lowest possible payment is the most important thing to you.
Savvy Home Loan Shopping: It’s the Person, Not the Institution
Experienced borrowers know that the individual loan officer or mortgage broker you are dealing with, rather than the brand, is often far more important to getting the best home loan.
It’s no secret that some of the nation’s largest lending institutions are also those that have committed the most fraud. Fortunately, their well-insulated CEOs have been able to afford to buy off accusations with a $26 billion settlement while the small brokers in the trenches were set up to do the hard time.
The funny thing is that many individuals believe they will get the best deal by walking into their local bank where they hold their checking accounts. Let’s keep it real. It doesn’t matter how long you have had an account there, unless you have $10 million in deposit, they don’t care who you are. Note that they will normally simply sell your loan and they won’t remain your lender after the first payment anyway.
Tip: If you are really in love with a certain bank, shop around through different mortgage brokers and you’ll probably find they can get you a better rate than going direct because they have access to wholesale rates.
Your Background Check Checklist
Being uncertain about who to trust when shopping for a loan today is only smart. Regardless of how large and famous a bank is, you should always do your own background checks on both the lender and your individual loan officer. This can be done for free in about five minutes online and could save you many thousands.
What to look for:
- The NMLS provides instant access to license status and complaint history.
- Each state licensing agency also provides its own online licensee lookup tools.
- Google them.
- Check consumer review sites like Yelp, and look them up on Facebook.
- Check the Better Business Bureau.
What Makes a Great Loan Officer?
Again, sometimes it doesn’t matter how savvy you are at how to compare lenders as much as the individual you will be dealing with directly. Despite all types of automation and advances in technology, mortgages are still so complex that it really still requires real people to be involved.
More than just a matter of honesty and integrity, how good your loan officer is at their job will make all the difference in your loan actually closing on time or even getting approved at all. Do not underestimate this. Your loan officer is like your personal champion who goes out to do battle for you every day to get your loan closed.
- They are knowledgeable about loan products and options.
- They have connections in underwriting the executive office and with other industry pros.
- Experience. Lending is so complicated it can only be mastered by years of hands-on experience.
- They take the time to match you to a loan program that best fits your personal goals.
- They are happy to answer all your questions (for the tenth time).
- They tell you what you need to know, not just what you want to hear.
The Bottom Line
When it comes to comparing lenders, remember that APR may be more important than rate, and size doesn’t really matter, but experience does.