When you start your home search, there are two people in your life who become important very quickly: your real estate agent, and your mortgage loan officer. If one of them doesn’t know what they’re doing, you can end up in serious trouble. Buyers often ask me how to choose a lender. They want to ‘shop’ rates and go with the lowest priced loan…after all, money is money, right? Well, yes, and fees are fees, and points are points, and when they don’t actually process your loan in time you are in default on the biggest contract of your life. Let me explain.
First, let’s discuss interest rates. Do NOT compare lenders solely on interest rates. Interest rates change every day, and they will be different on the day you sign a contract on a property than they are today. Your pre-approval letter does NOT lock in your rate (read the fine print on your letter.) So a lender who has the lowest rate today may not have the lowest rate tomorrow. You also need to compare apples to apples. You cannot look at rates without asking about points. Points are pre-paid interest. You pay a fee at closing to buy down the interest rate for then entire life of the loan. A point always costs you 1% of the amount you are borrowing, but what you get for it changes every day depending on the market. So, for example, on a $400,000 loan you might pay one point ($4,000) at settlement to buy down the rate from 4.175% to 3.875%. Whether or not to pay points depends on how long you are going to keep that loan–if you buy down the rate but then refinance a year later then you’ve wasted that money because you pre-paid it. Of course with today’s all time low rates it’s hard to imagine refinancing, but people said that a year ago too! A lender charging 4.175% with no points might be a better deal than a lender charging 4% with one point when you do the math. Points generally have declining benefit; If you get 0.5% off with the first point, you may only get 0.1% off after the second point and perhaps nothing after the third.
After you look at rates and points *together*, you look at the lender fees at settlement. Lenders need to make money too, and they want some of it up front in the form of fees. Some are negotiable and some are not, but don’t fall for the trick of looking at the total closing costs–compare *only* those fees that are charged by the lender. The lender might underestimate the settlement charges, for example, to help hide his own exorbitant underwriting fee.
Finally, and most importantly, you need a lender that will get the money to settlement on time! Your deposit could be at risk if he doesn’t. Do NOT assume a big bank can close on time…in fact, lately I have found the opposite to be true. Often a big bank can be more difficult to deal with because the underwriting department is in a whole other state and has no ongoing relationship with the loan officer. Turn around times are slow, and when they are juggling the huge volume of loans they have, they tend to wait until the very last minute to get things done, creating extraordinary stress in the days leading up to settlement.