Lending Can Be Confusing

Because the process of loaning money for a residential property contains so many regulations, redundant paperwork and rules for interpretation, those involved in the process spend their time working with the mechanics of the lending process instead of focusing on getting the best deal for the borrower.   Loan officers are often caught up in shepherding their loans through underwriting in order to get a timely approval.   After considerable effort with the underwriter, getting the loan to and through closing can also be a significant challenge and  time commitment for the loan officer handling the loan.

Can Lending Be Simplified?

There have been efforts to simplify the closing process.    Some have come from inside the lending industry, including paperless processing.   The government has also attempted to simplify and clarify the process with regulations like the Dodd-Frank Financial Act, which everyone knows has been anything but a simplification.   This onerous Financial Act, although officially passed by both houses of congress, is still being written as we speak.    Those authoring the continuous writing of these regulations seem to care little for simplification or protecting the borrower, but more with unnecessary oversight, increased taxation and special treatment for friends of the current administration.

Lost in all this confusion and government intervention is a reasonable home loan for the American consumer.

Cash To Offset Closing Costs Is Available

Finding advantages for the consumer must be done by picking apart the overall lending process and finding pieces of the puzzle that can be exploited.   Closing costs are one of the areas where the consumer can get some help.   All lenders serving the residential lending population publish daily mortgage rates.    These rates are broken down in 1/8th percent increments.   At each interest rate increment lenders attach a premium that can be used to pay the loan officer or give cash to the borrower to be used to reduce closing costs.    The higher the interest rate, the higher the available payout.    These dollars used to be the money with which the lender paid the loan officer for their services.   Early in 2011, the infamous Dodd-Frank Act stopped this process.    The loan officer must now just charge outright for their services, and the premiums associated with interest rates can be made available for consumer use.

Ask To See All the Loan Options

Borrowers should always ask their loan officers to show them all the rate increments and premiums available on any given day.    The borrower can review the rates and determine which works best for them.    It is very conceivable and acceptable for a borrower to select a higher rate and a slightly higher monthly payment connected to a large dollar premium.    This premium can be used by the borrower to directly offset closing costs.    For someone looking for a loan but a little short of cash, this premium available at closing may be just the advantage needed to successfully obtain a new residential loan.

Currently, there is one website where borrowers can see everything the loan officer sees, including all the available rates, payments and cash premiums available to offset closing costs.    Click here to run your scenario and see all the options.

“…there is no reason that every person who is looking to purchase a home or refinance the one they’re in should not comparison shop.  Not only between rates, but also between lenders.”

Americans, it’s safe to say, are shoppers at heart.   And, more importantly, we are comparison shoppers.  From boots to boats, hand towels to houses, we are driven to find the best fit, the best name, the best bargain.

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For some inexplicable reason, however, we abandon this need to compare when it comes to home financing.   We go to a lender, sign some paperwork and more or less take when they offer us.  Are we happy with the final outcome?  Maybe.  But all too often we’re actually more or less just resigned to it all.

But if there’s one area in which comparison shopping should be done, it’s in the home financing process.  After all, for most Americans, home buying and ownership represents the largest investment and asset transaction they’re likely to make.

Here are a few things that are important to know:

1. Although Americans used to be more likely to buy a new home rather than remodeling the one they were in, that trend has shifted.  ( http://www.housingzone.com/professional-remodeler/article/buildfax-remodeling-index-shows-top-april-record)   So it’s important to consider a longer term view of home ownership than you might have previously.
2. Saving as little as an eighth of a percent on your interest rate can save you tens of thousands of dollars over the term of your loan.
3. Thanks to online resources, you as a consumer have more opportunity than ever to evaluate not only interest rates, but also the cost of those rates.
4. Sometimes it is better to have a slightly higher mortgage payment and pay less in closing costs.
5. Lenders differ significantly not only in pricing strategies, but also in business practices and service delivery.

Given this information, there is no reason that every person who is looking to purchase a home or refinance the one they’re in should not comparison shop.  Not only between rates, but also between lenders.

There are several online lending services which pull your credit report and then shop it between lenders.  When you receive their offers, you choose which suits you best.  Obviously, this does require you to release information, including your social security number, to the sites who essentially serve as a mortgage “hub”.   Another limitation of this type of service is that you are not seeing the back-end pricing on the loan—only the available interest rates and the discount points the loan officer wants you to pay to get a specific rate.

A less intrusive and more transparent tool is RateWindow®, which collects very basic information (i.e., the state you’re living in, the property type and value, occupancy and how good you estimate your credit to be) and instantly tells you the available rates, pricing options, an

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d how much money you can save in your closing costs.  Thing the lender sees.  The only time that you will have contact with a lender is when you ask for more information.

Comparison shopping for home financing really can save you money and increase the satisfaction you’ll feel at the end of the mortgage process.  Compare mortgage options with RateWindow®.

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Purchasing a Home with RateWindow®

For years my boss encouraged me to purchase a home.  I think he must secretly think I’m an awesome employee and that if I purchase a home then I would HAVE to continue working for him to pay for it.  Regardless of my delusions about my “employee of the year” status, the thought of purchasing a home scared me to death.  I had visions of throwing dollar bills into the fireplace and watching them curl up in flames.  Additionally, I am not a good saver.  I had no idea how I was going to come up with all the money needed for closing costs.  Then my boss invented RateWindow®.

Here’s the beauty of RateWindow®:  it allows you to choose your interest rate based on how much help you need with your closing costs.

When purchasing a home, a borrower first needs to discern how much he can afford.  A good rule of thumb is choose a purchase price that is 2 to 3 times your gross annual income.  How does that translate to a mortgage payment?  Check out ratewindow.com. Anonymously, you can enter a few pieces of information and come up with a basic idea of what kind of monthly mortgage payment you have.  But, you’ll get even more valuable information.

I knew the purchase price I needed and I also knew how much the mortgage payment was.  I needed to know how much my closing costs would be when purchasing a home.  With RateWindow®, the loan officer disclosed his fees up front.  This made it easier for me to estimate the amount of money I needed…which was still more than I had.

Then, suddenly, some of my circumstances changed and I needed to purchase a home fast.  But I didn’t have enough money.  Again, RateWindow® helped me.  With RateWindow® I was able to look at the interest rates and see a corresponding Freebate.  The Freebate was the amount of money that the loan officer would apply to my closing costs.  By simply choosing a slightly higher interest rate (which gave me a slightly higher mortgage payment), I was now able to purchase a home.  For example, I was originally looking at a rate of 4.375% with a monthly mortgage payment (principal and interest only) of $699.  However, by taking a higher rate of 4.5%, I was able to get an additional $1,572 towards my closing costs.  And here’s the kicker – it only raised my monthly mortgage payment by $7.

I’ve worked with many loan officers.  There are good, honest, decent loan officers and there are a few who would rob their mother blind if it meant they could make another dollar.  RateWindow® helps borrowers find the good, honest, decent loan officers; while still allowing the loan officer to make a living.  RateWindow® connected me with a loan officer who offered the Freebate.

With the help of RateWindow®, purchasing a home became a lot less scary and a lot more exciting.

Okay, so I admit it—the article isn’t ACTUALLY about transparent mortgages, per se.   It’s about how to reduce the amount of closing costs that homebuyers have to pay.   But one of those suggestions?  To shop and negotiate all of a loan’s terms, not just the rate.

Finally!  Folks are starting to get it!  There is more to a mortgage loan than just an interest rate…a lot more.  And if there’s one thing that the past few years has taught us, it’s important to take a look at all of the details before making a decision as big as the one to buy a home.

Here’s an example that’s pretty close to home for me.   A friend of mine—we’ll call her Janice—was looking at buying her first home.   Now, in the interest of full disclosure, I have to tell you that Janice has worked in my office for about 10 years or so, so she was pretty familiar with the mortgage process.  But this time it was different, because it was her name on the mortgage.

Now, she was bound and determined to get absolutely the lowest rate she could possibly find.  Weeks went by as she considered loan option after loan option, debated whether to lock her rate or let it float—to tell you the truth, she was making us all a smidge nuts.  (Sorry Janice.)  But one day, when she was going through everything that she would have to bring to the closing table, she took a closer look at the rate sheet.   And what did she realize?  That by taking a rate that was just 0.5% of a point higher, she would receive a credit of almost $2,000 that she could use toward her closing costs.   That made a huge difference in her budget.  But the difference in her monthly payment?  $9 a month.

Now there are those folks who would start protesting and saying how when you multiply that $9 a month over the term of the loan, you’d pay thousands more than the credit you received.  Yeah.  So again in the interests of full disclosure, I should tell you that after Janice has paid on the loan for 217 months—almost 18 years—she will indeed be “upside down” on that $9 a month payment.  It is also likely that by then she’ll be making more money than she is now—at least more than $9 a month more—or that she will have long since sold the house.

Listen, the point is that everyone who is buying or refinancing a home needs to look at all of the loan terms—including asking to see the back-end (transparent) pricing that the loan officer sees—before making a decision that will impact their budgets now and in the future.   And yes, requiring lenders to be as competitive as possible in every aspect of the loan programs they’re promoting.

Congratulations, Washington Post.  You got this one very, very right.