Reprinted from The Wall Street Journal
By Carlos Tejada
The Wall Street Journal
After finding a $149,000 ranch style home in Aurora, Colo., George J. Vallos went on another shopping mission. He visited five mortgage brokers looking for one that offered low rates and reasonable closing costs.
One broker “really loaded them up, but I finally got what I wanted,” says Mr. Vallos, an investor.
With rates low and competition among mortgage lenders intense, the home loan business has become a borrowers’ market. Many lenders are willing to negotiate terms and cut or even eliminate fees.
‘Like Going to Filene’s Basement’
Mortgage shopping now “is like going to Filene’s Basement to get clothes, or CompUSA to buy a computer,”” says Patricia C. O’Connor, senior vice president of CoreStates Mortgage Services Corp., a unit of Philadelphia based CoreStates Financial Corp. Housing experts say upfront fees and charges for loans are at the lowest level since the early 1970s. Although comparing mortgages often is difficult, because each lender requires different fees, data compiled by the Federal Housing Finance Board highlight the overall trend. In the past two years, its numbers show, upfront fees and charges have dropped to less than 1% of the total mortgage amount, compared with the 1% to nearly 3% of the mortgage amount that homeowners traditionally paid. Preliminary 1997 data show costs sliding a bit further.
One reason is today’s low interest rates. With 30 year, fixed rate mortgages widely available at rates as low as 7.25% to 7.5%, consumers are much less likely to pay “buy down” points of one percent to two percent of the loan to get a better interest rate over the life of the loan. Competition has also forced many lenders to cut origination fees, which also run up to 1% of the mortgage amount, or $1,500 oil a mortgage of $150,000.
Savings Passed to Customers
At the same time, improvements in technology, including competing software packages from mortgage buyers Fannie Mae and Freddie Mac, have reduced lenders’ costs, allowing them to pass some savings on to consumers.
Ms. O’Connor of CoreStates says her firm’s cost to produce a loan dropped 20% between 1997 and 1996, largely because of Freddie Mac’s Loan Prospector software and other improvements. Much of the savings have been passed on to customers, she says. Meanwhile, the better technology also has allowed CoreStates to offer more selection: Its listing of loans available has grown to five pages from two since 1994.
Ronald A. Fleagle, a mortgage broker for Mountain States Mortgage Consultants in Denver, says he sometimes cuts origination fees if he thinks it will help him win business he wants. “I don’t care because I still get the loan,” he says.
‘A Commodity Market’
Mortgage brokers like Mr. Fleagle, who compare rates among a number of different lenders, became a major presence in the early 1990s during a refinancing boom. Though many were eliminated when rates spiked up in 1994, those who are left scramble for volume.
“It’s fierce competition in what has become a commodity market,” says Doug Duncan, an economist with the Mortgage Bankers Association of America, a trade group.
Competition can be especially bruising on the Internet, where small, scrappy brokerages use low rates and fees to vie for business. Mr. Fleagle, of Mountain States, says most of his business comes from the World Wide Web, where prospective homeowners who plan to move to the Denver area can check his Web site and compare his rates with those of bigger competitors.
“With a couple of keystrokes, you call check the rates and programs of two or three dozen lenders in your area,” says Alan Fields, co-author of the book “Your New House.” He recommends the Web site of HSH Associates (http://www.hsh.com), a Butler, N.J., firm that tracks rates from more than 2,000 lenders.
Even those who prefer the phone should compare and dicker. Mr. Fields says borrowers shouldn’t hesitate to ask different lenders to match or beat low fees. Even costs that lenders claim they can’t control, like attorneys’ fees and appraisal fees, can vary from one shop to another. Mr. Fields also recommends getting a fixed number instead of a range: Appraisal fees, for example, can go from $150 to $300.
Beau Brincefield, an Alexandria, Va., real-estate attorney, says that mortgage borrowers should get all the fees and their amounts in writing upfront, not just before the loan is supposed to close. Prospective borrowers should get a “Truth in Lending” form, a federally mandated accounting of a mortgage’s costs and demand an itemized list of the fees to be charged at closing.
Mr. Brincefield says buyers should question fees that sound suspicious, such as photo fees (because the appraiser takes pictures of the house), amortization schedule fees (paid for printing out the borrower’s payment schedule) and warehousing fees (charged by the borrower for holding your mortgage before selling on the secondary market).
“Make it clear that if there are additional fees at closing that you didn’t know about, you may see him in court,” Mr. Brincefield says.
Before using a mortgage broker, do your homework. Get an idea of what loan rates and other terms are in your area. Otherwise, you won’t be sure that you are getting a good deal from a mortgage broker.
If mortgage brokers are licensed in your state, ask the licensing authority whether any complaints or disciplinary actions have been filed. Mr. Fields recommends asking a broker to provide a track record of previous deals or phone numbers of satisfied customers.
Finally, housing experts say buyers shouldn’t pay for anything they don’t have to. “It’s your checkbook. You’re the one in control of the situation,” says Albert Clark, vice president of the United Homeowners Association.
Reprinted from The Wall Street Journal, Friday, October 3, 1997.