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How to Shop for Mortgage

Deciding between options

April 20, 2018

By JACK GUTTENTAG The Mortgage Professor (Tribune News Service)

Q: How many price quotes should I get in refinancing my mortgage?

A: Get as many valid quotes as possible. Two or three valid ones help; 10 phony ones are worthless, or worse.

Valid price quotes must meet three major conditions:

  • Same market timing: All quotes must be as of the same day, since mortgage lenders reset their prices every morning. Comparing A's price on Monday with B's price on Tuesday is looking for trouble.

  • Same transaction features: Valid price quotes are based on the same assumptions regarding the features of your transaction that affect price. These include the loan amount, property value, type of property, zip code of property, lock period, whether or not you are waiving escrow, your FICO score, and whether you are occupying the house or renting it. And on a refinance, you must indicate whether or not you are taking any cash out of the transaction.

    If you don't specify all of these factors, the lender will probably assume the best so the price quote will be as low as possible. For example, if your home is a duplex, which usually commands a higher price, and you don't indicate it in soliciting a price quote, the lender will assume that it is a single-family home because that commands the lowest price.

  • Absence of low balling: Even if you specify all relevant transaction features, some loan officers will quote a price below the price they could actually deliver that day, a process called low-balling. The purpose is to win the bidding contest with other LOs so that you will come back.

If you do come back, the low ball price quote will be explained away either by changes in the market since the original quote, or by transaction features that you neglected to mention when you solicited the original quote. Indeed, low-balling. is most likely to occur with borrowers who request a price quote without specifying all the relevant transaction features that affect the price.

To obtain prices on my website, shoppers must enter all the information that affects prices -- otherwise the prices don't appear. Prices are shown for each lender, they are always current, and they are received directly from each lender's pricing system, bypassing the lenders' LOs.

Is Zero-Plus Mortgage Good Deal?
Q: The zero-plus mortgage has no origination, underwriting or processing fees and gives the borrower a $1,000 closing credit. Will it save the borrower a bundle, as advertised?

A: This question can't be answered definitively without knowing the interest rate charged and all the transaction features that affect the price. Nonetheless, I am quite confident that the answer is no because this lender is doing nothing more than giving a special name, and tying a ribbon around, a standard option that all lenders offer.

To illustrate the point, I shopped for a 30-year fixed-rate loan of $380,000 on April 14 and was offered 16 combinations of interest rate and lender fees. These ranged from a fee of $10,485 with a rate of 3.75 percent to a credit of $22,325 at a rate of 5.625 percent.

Within that distribution is another option, consisting of a rate of 4.375 percent and a credit of $1709. If I retained that rate but cut the credit to $1,000 and called it "The Lender's Special", it would have no origination, underwriting or processing fees, and it would provide a $1,000 closing credit. But it would be a rip-off rather than a bargain.

Take Home Equity Conversion Mortgage Now or Wait?
Q: I am 62 and won't need any funds till I stop working at 65. Should I take a HECM credit line now and sit on it, or would I do better to wait three years and take it then?

A: If you take a credit line now and let it sit unused, the line will grow at a rate equal to the mortgage interest rate plus the 1.25 percent mortgage insurance premium rate. If you wait three years, the initial line will be larger because you are three years older and (presumably) your house will be worth more. In working the numbers, I found that with an annual house appreciation rate of about 2.5 percent, it was a wash. If you expect appreciation to exceed 2.5 percent, you do better by waiting, and vice versa.

About the Writer
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.

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