The Lowest Mortgage Rate Isn't Always The Best Deal

According to Kris Drake, a branch manager for Plaza Mortgage in Overland Park Kansas:

You are pre-approved, but are you getting the best loan for your money?

When it comes to choosing a mortgage, borrowers concerned with finding the lowest interest rate should understand that the mortgage of their dreams could turn into a nightmare.

Often borrowers miss the bigger picture. Closing costs that are far higher than estimated may outweigh what appears to be a break on the interest rate.

Once a transaction has begun, lenders are required to provide borrowers with a good-faith estimate (GFE), along with a truth-in-lending disclosure, within 72 hours. This estimate encompasses the interest rate, total amount of the mortgage, the terms of the mortgage and all fees required to close the transaction.

The problem is that both of these documents are estimates, not guarantees.

Scams abound and unscrupulous lenders have no intention of sticking to that GFE. So they happily quote a rock-bottom rate and may underestimate closing costs. A great “deal” on a mortgage rate is no deal at all if the transaction never closes, or if your closing costs outweigh the interest rate savings.

Imagine the borrower—armed with a pre-approval letter and having paid for an appraisal, credit reports and other documents—finding that the underwriter denied his loan the day before closing. The buyer can’t get the loan, and the seller, who was prepared to close on his new property the next day, is out of luck. Pre-approval and pre-qualifying are not guarantees. Only a lender’s commitment letter ensures that a full examination of income, credit and assets has been fully verified and the borrower will receive the loan.

We recently assisted an unsuspecting borrower who never got a GFE on the remarkably low interest rate offered to him by an unscrupulous lender, but he had accepted a verbal assurance that his closing costs would be $3,000. He got the shocking news at closing that the actual costs were $12,000. He was too embarrassed to complain to the BetterBusiness Bureau.

A qualified, reputable mortgage company will explain to a borrower that while it is permissible by law that the GFE disclose a range of costs on some items that cannot be precisely predicted, certain costs can be ascertained and noted as such. Mortgage companies should regularly review relevant costs so that their GFEs reflect current pricing of items such as appraisals, inspections and the like. A good faith estimate should be within $100 of actual expenses.

Before you make a mortgage choice:

• Determine the stability, size, history and reliability of the company you are dealing with. Check area newspapers’ lists of “top mortgage companies.” Check with your real estate agent to see if he or she has worked with the company before. Ask friends for a referral.

• Make sure any Internet lending company you work with provides you access to local brick-and-mortar and in-person service should questions arise. You want to make sure that you get immediate customer service when you call and that the company still exists when you are ready to close.

• Make sure you are getting the right mortgage product. Often, mortgage companies that have limited access to the newest products will place you in a product simply because they are able to sell it. If you then shop only that product around for the lowest rate, you may have missed out on other proprietary products that would have saved you more money each month and over the life of your loan.

• Plan to pay your closing costs up front, unless you are going to be in your house less than two years. If you wrap your closing costs into your interest rate, your interest rate will be higher.

• Be wary if your lender does not ask enough qualifying questions about your income, assets and credit history. Know the difference between being prequalified, being pre-approved, and having a commitment. Pre-qualification is based on undocumented information. Pre-approval is based on information that is documented and verified. A commitment is received when information is definitely documented, reviewed and approved by the underwriter.There still may be conditions on the commitment letter that require verification.

The Real Estate Settlement Procedures Act, or RESPA, requires lenders to disclose information to customers protecting the borrower from abuse. But borrowers must be cautious as well. You don’t want to pay an exorbitant price in the form of unforeseen closing costs just to save an eighth of a point on a home loan. A slightly higher monthly payment may be cheaper in the long run.

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