There are three basic ways to get a residential mortgage. Each has its pluses and minuses, but two have the potential to save you considerable money over the first, and one potentially can save you much more over the other two.
1. The most popular option is to go into your bank, talk to the loan officer, and let him or her guide you through the transaction.
This approach saves you anxiety: you have a contact person whom you trust and will hold your hand as you navigate through the paperwork and other hoops and hurdles.
But that pleasant interaction hides what’s going on behind the scenes. The real business is being transacted in the back office, where your case has been assigned to someone – the “underwriter” – to collect all your financial paperwork and other documents, obtain your credit score, and generally prepare the case for presentation to the loan committee, where the final decision will be made whether to offer you the mortgage loan. This offer – the “Commitment” – will be contingent on several things, including an appraisal of the property to ensure that the value is at least as much as the mortgage on offer.
You’ll be given an interest rate and assessed fees (“points” or percentages of the mortgage amount) and often saddled with other charges, such as an “application fee”, a fee for locking in your rate and the costs of appraising the property.
Usually, as soon as you close on your house your mortgage will be “sold” by the bank to a mortgage aggregator, such as Fanny Mae, who will promptly bundle it with other mortgages and sell bonds backed by the mortgages to investors. This is called “securitization”. The bank will still be involved as the mortgage “servicer”, meaning that you’ll send your payments to the bank who will then forward it (minus a fee for its service) to the entity then holding your loan.
This is the standard procedure and there’s nothing nefarious about it.
But one expense goes unstated: you’re paying for the upkeep of the brick-and-mortar bank and the salary of your hand-holding loan officer!
2. The second option is to go through a mortgage broker who has access to many different lenders.
It’s important to understand what that broker does for you: the broker will refer your inquiry to a number of lenders who will contact you and try to solicit your business. The broker will be paid a small fee by the lenders for the referral. The mortgage broker will not negotiate on your behalf or try to get you the best deal. Yes, the mortgage broker will tell you about the exceptionally low rate you’ll qualify for, but it’s only once you’re put in touch with an actual lender that you’ll discover the actual lender-specific rate, fees and other charges.
It’s easy to find a mortgage broker: sites such as Lending Tree and Zillow act as brokers and will put you in touch with lenders who meet their quality criteria. A couple of the lenders may be traditional banks, but most will be “internet banks”, with no physical presence. They are regulated and have to qualify with the state authorities to make mortgage loans.
You will field calls from several lenders and can compare their offers. The person on the phone will quickly yield to an underwriter, who will take charge of the process. From there the process unfolds similarly to option 1.
This option has the advantage that you’re not paying for the brick-and-mortar bank. The rate you get will almost always be lower than that offered by a traditional bank. As long as they go through and issue a commitment and then make the loan everything is fine.
3. The third option – and the one most likely to yield the cheapest mortgage – is to run a “reverse auction.”
This course is a variation of the second. Once you gather the rates from the lenders who call you, run what I like to call a “reverse auction”: take the lowest rate, fees and charges and call back the others and tell them they have to beat that package. One or more likely will. Then take that rate and go back to the others and tell them they have to beat the new rate! Repeat this process over and over until all but one drops out! You’ll have the cheapest rate available.
There’s nothing dishonest about running this “auction”: you’re telling the lenders the truth about the rate you have in hand and giving them the opportunity to win your business.
Remember, though, that the rate isn’t the only thing that goes into pricing a mortgage: there are fees and charges too. But the lenders will compete on all of these items, so be sure to include them in the negotiation. The goal is to get the best combination so the total APR (or “annual percentage rate”) is the lowest. This number will wrap in all costs and will be a good (though not perfect) basis for comparison.
I know of several people – myself included! – who emerged from the process with a rate that left others with dropped jaws, no points and healthy contributions from the lender to cover all, or most, of the bank’s closing costs! All of this can be accomplished with 2 to 3 days of telephone calls.
This option requires the most work and some nerve. But once you do it you’ll want to apply the technique to other major purchases.