Select your lender on customer service quality.
A typical home buyer is naturally drawn to the lowest mortgage rates advertised. However, often times going with the lowest rate will reveal that it may be too good to be true.
Recently, we became aware that an online lender was offering an unbelievable 2.5% fixed-rate mortgage. Upon further investigation, it became clear that in fact this lender was advertising adjustable-rate mortgages as fixed-rate mortgages. An adjustable rate mortgage has a lower rate because it is guaranteed for a smaller, set period but then increases over time. A fixed-rate mortgage is guaranteed for the life of the loan.
Fortunately the Federal Trade Commission swiftly fined this swindler because it's illegal to bury disclosures in fine print that contradict a more prominent advertising pitch. The typical borrower may have difficulty determining the legitimacy of mortgage loan rates. Consider the following and protect yourself against shady lenders:
- Know your lender. Sounds simple but take this seriously. Choose your lender based on referrals, credentials and experience rather than advertisements. Make sure to check the rating of the company with your local Better Business Bureau.
- Understand 'rate' versus 'APR.' The Annual Percentage Rate is the rate PLUS a additional closing costs, which can vary from lender to lender. The APR is always higher, and is more relevant when comparing loan offers.
- Clarify all closing costs. Even if a lender claims to not charge closing costs, it's probably just careful (and deceptive) phrasing. There are always closing costs, possibly charged by a third party.
- Know the usual fees. Origination, appraisal, processing and underwriting fees typically add up to around $2,000, plus you can expect to pay title and transfer fees. You may pay 'points' or put a deposit in escrow for taxes and insurance.
- Be wary of changes after your rate has been locked in. If there are any, ask why. Any departure from your original quote should be minor, or your lender wasn't qualified to give you an accurate quote from the start.
Any lender can offer you a good deal based on today's low rates, but we recommend that you make your selection based on customer service and trust. If it doesn't feel right, it probably isn't!
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