Shopping For a Mortgage On-Line
September 19, 2005, Revised December 5, 2005, January 12, 2006, May 11, 2006, December 12, 2006, October 10, 2008

This article is on the why, which, and how of shopping for a mortgage on-line: why seek a mortgage this way, which sites are the best, and how do you shop effectively? It is limited to sites on which the loans offered are from a single lender.

Why Shop For a Mortgage On-Line?


Shopping for a mortgage on-line involves finding the best price among the different single-lender web sites that price your mortgage. On-line mortgage shopping offers numerous advantages.

On-Line Prices Are Easier to Find and to Shop


If your loan is priced on a web site, it will be easy to find, and to compare to the quotes on other sites. In contrast, price quotes in the hard copy media are never provided in the detail required by most shoppers and are always out of date. Telephone and email quotes by brokers and loan officers cannot be relied on unless the borrower knows the source and has good reason to believe it is trustworthy.

On-Line Pricing Is Often Better


Lenders acquiring loans through their web sites avoid the costs of maintaining retail lending facilities, including the commissions paid to loan officers. Because of competition among on-line lenders, the cost savings are generally passed on to borrowers. Some sites warn users to expect higher prices if they go off-line.

Price Volatility Is Easier to Manage


The mortgage market is highly volatile. Lenders reset their prices every morning, and sometimes during the day. Unless price quotations from different loan providers are obtained at about the same point in time, they are not comparable.

This is a major problem in off-line shopping because it takes so long to obtain reliable price data. It is not a problem in on-line shopping because on-line price quotations can be quickly refreshed.

You Avoid Price "Low-Balling"


Low-ballers are loan providers who ensnare customers by quoting low prices they have no intention of delivering. The client is informed that the price will be locked at the “market price” prevailing at the time of the lock, but the market price is what the low-baller says it is. In many cases, the lock price is higher than the price quoted to a shopper for the identical loan at the same time.

On-line shoppers are not vulnerable to price low-balling because they can check their price on-line on the lock day. An on-line lender cannot quote different prices to shoppers and lockers.

See Locking the Mortgage Is Critical In a Volatile Market.

You Avoid Third Party Settlement Cost Low-Balling


Some loan providers low-ball third party settlement costs, which they can’t be held to because they are “estimates”. Sometimes they do the opposite, marking them up in order to pocket the difference. See How to Shop Settlement Costs.

These practices usually work off-line, because information on third party costs typically is not provided until the shopper receives the Good Faith Estimate (GFE), which under the rules need not be given them until 3 business days after the lender has received the loan application. The only way to obtain more than one GFE as a check on the estimates is to apply to more than one lender, which is tedious and time-consuming.

In contrast, on-line shoppers can easily collect settlement cost information from multiple lenders at the same time they are shopping lender prices. Having multiple estimates is an excellent defense against low-balling or markups.

You Avoid Lender Fee Low-Balling


Some lenders low-ball their own fees, which under the rules are also considered “estimates”. While points, which are charges expressed as a percent of the loan amount, are included in a price lock, fees specified in dollars are not included. Some lenders deliberately inflate these fees as the borrower moves closer to closing. Home purchasers are the most vulnerable because they can lose the home if they don’t close on time. See Legal Thievery at the Closing Table.

This is not a hazard to on-line shoppers, however, because the shopping sites clearly identify their fees and many of them guarantee them. While others don’t explicitly guarantee their fees, displaying them on-line is almost as good, since the lender would have difficulty defending a different number at the closing table.

You Avoid Being Scammed When You Change Your Mind


Shoppers often change their mind about the deal. For example, they decide to switch from a 30-year FRM to a 5-1 ARM, pay points to lower the rate, make a larger down payment, waive escrows, etc. If an off-line loan provider figures that a customer is committed, the price of the new deal may be higher than the price that would be quoted to a new shopper. This cannot be done to an on-line shopper who can check the price of the new loan on-line.

On-Line Shopping Versus Use of Lead Generators


It is instructive to compare on-line shopping with getting a loan through a lead generation site (LGS), such as Lending Tree. LGSs collect information about you, and match it to up to 4 lenders who contact you to make offers. An advantage over shopping single-lender sites is that you only have to enter your financial information once. When you shop on-line, you must enter the information for each site you shop. That is the only advantage of LGSs.

One problem with LGSs is that they do not provide any way to deal with price volatility. If the lenders contact you on different days, their prices are not comparable. Similarly, LGSs do not protect you against low-balling of prices or lender-fees, markups on third party settlement services, or over-charges when you change your mind about the deal.

Yes, the lenders who come to you through a LGS do compete for your loans, but that doesn’t mean that you will win. They may be competing to see who gets the opportunity to scam you. See Mortgage Lead-Generation Sites.

Caveat: The Weakness of On-Line Shopping


All the advantages of on-line shopping cited above assume the shopper can price his particular deal on the sites being compared. A shopper with a FICO score of 500 who needs stated income documentation and cannot make a down payment, cannot price his loan on-line. If he goes to any of the good sites, he will be routed to a loan officer and has to face all the hazards discussed above that on-line shopping avoids.

Which Single-Lender Web Sites Are Worth Shopping?


Borrowers who shop for a mortgage on-line, for any of the reasons noted above, should only spend time on sites that price their loan. If a site doesn’t price the type of loan you want, with the features you require, don’t bother with it. You are on-line to shop, not to be seduced into making a phone call.

When I first wrote this article in 2005 I scored 20 sites for the depth and comprehensiveness of the information provided to shoppers. Of these, I considered 18 worth listing because they had some price functionality and showed all settlement costs. When I revised it in 2008, however, I removed the listing because I had since developed a certification procedure for Upfront Mortgage Lenders (UMLs), which is better. Among other things, UMLs provide a summary of all the market niches priced by the site, and disclose all the major features of their adjustable rate mortgages (ARMs).

I did retain the scoring system I used because it shows in some detail the features I consider important to borrowers in a web site.

The Scoring System


A site with a higher score is one that prices a larger number of potential transactions, and provides shoppers with the information needed to make decisions. Here are some examples of the scoring system I used:

Mortgage Types and Features Priced by the Site


For every program they price beyond 15 and 30-year fixed-rate conventional loans, a site receives 1 point. This includes different types of ARMs, balloon loans, and FHA/VA loans. They also receive a point for disclosing each important ARM feature.

Down Payment Pricing


A site that allows the user to enter the down payment receives 2 points, and an additional point if the down payment can be less than 5%. If the site uses one down payment in all its pricing, but tells the user what that assumption is, it receives 1 point.

Settlement Cost Disclosures


A site that shows all settlement costs receives 1 point, another point if lender fees are segregated, another point if lender fees are guaranteed, another point if the guarantee includes the appraisal, another point if the guarantee includes the credit report, and 2 additional points if it covers all third party fees.

Rate-Point Options


A site receives 1 point if some of the mortgages are priced with multiple combinations of interest rate and points, an additional point if rates are shown for negative points (rebates), and a point if it explicitly prices no-cost loans.

How Do You Shop On-Line?


In my 2008 revision, I decided to retain this section as well, but readers should also consult How to Use Upfront Mortgage Lenders.

1. Decide Whether You Are a Shopper

On-line shopping is not for those who are computer-phobic or mortgage-allergic. If you feel overwhelmed by the complexity of mortgages, and don’t have the time, energy or desire to educate yourself about them, internet shopping is not for you. Select a UMBto shop for you, see Dealing With an Upfront Mortgage Broker.

2. Determine Whether You Qualify For on-Line Shopping

You can’t shop on-line unless your particular deal is priced on-line by at least some lenders. For the most part, this excludes borrowers with poor credit. If you have a credit score below 620, most of the sites will deal with you, but off-line – “Bad credit? Call us”.

Single lender sites vary greatly in the extent of their niche adjustments. The trick is to determine whether the questions posed by a site have captured your particular niche adjustments. If you are buying a two-family house, for example, and you are asked about “Type of Property” with “Two-family house” one possible answer, then you know that they adjust for that. On-line shoppers also do best if they can fully document their income and assets. All UMLs have a page that I designed that shows the market niches they serve.

3. Decide the Mortgage Features You Want

You can’t compare prices of different loan providers accurately unless you can specify exactly what you are shopping for. When you shop for an automobile, you decide beforehand that you want, e.g., a 4-door Toyota Corolla with Bose speaker system 102, red trim, etc. Similarly, when you shop for a mortgage, you should know the type of mortgage you want – whether fixed-rate (FRM) or adjustable rate (ARM), and if the latter, what kind. You should also know your preferred term, points, down payment, lock period, and options including interest-only, prepayment penalty and waiver of escrows.

I have articles on all these topics but to make it more manageable for shoppers I recently added Tutorial on Selecting Mortgage Features.

4. Compare Multiple-Price Quotes From Different Sites

If you are selecting an FRM, you must consider both rate and total lender costs, which includes points and all other lender fees. Assuming you are seeking the best deal on the 10-year FRM from UMLs 1, 2, 3 and 4:

a. At lender 2’s site, find the rate that is closest to the number of points you previously decided you wanted to pay.

b. Calculate the dollar value of these points and add it to the lender’s fixed-dollar fees to get the total lender fee for that rate.

c. Now go to lenders 1, 3 and 4 and repeat the process for the same rate. Since lenders usually quote rates in increments of 1/8%, you should be able to find the exact same rate.

d. Holding the rate constant at the 4 sites, the best deal is the one with the lowest total lender fees.

6. Comparing Prices of ARMs

On ARMs with initial rate periods of 3, 5, 7 or 10-years, follow the same procedure. If you are 99% confident you will be out of the house before the end of the initial rate period, take the ARM with the lowest total fees at the same rate.

If you are not sure that you will be out before the end of the initial rate period, you should consider what might happen to the rate at that time. That will depend on the rate index, margin, and rate caps, which may differ between lenders.

It could turn out, for example, that the 5-year ARM with the lowest cost over 5 years leaves you more exposed to higher interest rates after 5 years. In that event, you need to decide whether the cost saving is worth the added risk. How to make this judgment is discussed in more detail in Tutorial on Selecting Mortgage Features.

Borrowers who opt for an ARM with an initial rate period of 12 months or less can use much the same technique, but instead of comparing the initial rate, they should compare the index plus margin. At the end of the short initial rate period, the rate is reset at index plus margin, subject to any caps.

If two ARMs are identical but you had to call one lender to obtain information on the margin or caps, select the other.
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