Homeowners with good credit want to find the best rate; are they making the right choice?
Q: Mortgage rates have fallen a lot since we bought our home in 2017. We thought it would make sense to refinance with our bank since we already have a loan with them. They immediately offered to reduce our rate from 4.25% to 3.75%. We said that was ridiculous in a market with 2.75% financing. They then offered us 2.75% but in each case, only if we would also pay more than $5,000 in bank fees. We have terrific credit, virtually no debt, substantial reserves, and far more than 20% equity. We’ve shopped around. We’re going elsewhere. Are we doing the right thing?
A: Lenders have no shortage of borrowers looking to finance and refinance. In early June, the Mortgage Bankers Association reported that its Refinance Index was 111% higher than the same week one year ago, while the Purchase Index increased 33% during the same period.
You were smart to shop around. By checking rates, you can compare offers.
Now, however, the mortgage pricing game has changed. Selecting a lender based on the lowest apparent rate can be a mistake.
Let’s start with some basics.
Lenders need to make a profit, but with historically-low interest rates, that’s been a problem. Add in a pandemic, and the problem is worse. You can see this by looking at the net income generated by institutions insured by the Federal Deposit Insurance Corporation (FDIC):
• $55.2 billion in the fourth quarter of 2019
• $18.5 billion in the first quarter of 2020
• $18.8 billion in the second quarter of 2020
What do lenders do in a low-rate environment? They seek new sources of income.
For instance, consider a refinancing offer where a low-interest rate was the bait, but the lender would receive thousands of dollars in fees in the fine print.
The way the offer was structured raised several questions.
If you apply for a loan and elect to go elsewhere, will you still owe some or all of the fee just for applying? How much? What if your loan application is simply declined? What will you owe to the lender in that case, if anything? Why are loan fees excluded from the APR calculation (the annual percentage rate)? What is included in a “bank fee” and what isn’t? What is the total cost of the loan? Without a detailed list of transaction costs, how can a borrower know what a “bank fee” actually includes?
For borrowers, the new world of super-low rates and strange fees means that some of the old mortgage hunting standards no longer apply. Sure, interest rates are important but so are the fees, charges and conditions associated with the loan application.
As you search for the best mortgage, look for interest rates that reflect reality. Ask yourself: What’s a competitive rate given your finances and credit? What do you owe the lender if you apply for financing, but for any reason, don’t get the loan? Can you see an official Loan Estimate (LE) before signing any paperwork?
Don’t settle for offers with big fees buried in small print. There are plenty of competitive lenders out there. Just be sure to ask questions, get answers in writing and shop around.