Not All Mortgages Are Created Equally

I recently had the experience of researching a mortgage for a buyer considering a purchase of an $810,000 home. At this price point, all loans are conventional so I was surprised by the differences even within the conventional model. Down payment opportunities fluctuated from 10 to 20%. Wells Fargo was the only lender offering a 10% down payment. The interest rate was 4.25%. A Wells 15% down payment resulted in a slightly lower rate of 4% and a 20% down payment was 3.75% which was the lowest rate quoted by any of the four mortgage lenders surveyed. AHFC/Conventional has a down payment program of 14% but depending on the lender that rate varied from 3.75 to 3.87%. But here is another ‘but’. With the same loan program and the same down payment, the principal, interest, taxes and insurance that make up the monthly payment varied by $65.72 or $787.64 per year. I don’t know whether or not the difference was with a property tax calculation, the homeowner’s insurance quote, mortgage insurance or if the lender may have rolled in some of their fees but any consumer should ask those questions. I also found almost a $300 difference in monthly payments with 15% down payment, even when the rate was the same so it pays for a buyer to do some comparison shopping.

According to a monthly report provided by Fidelity Title, the top three mortgage lenders are Alaska USA Mortgage, Residential Mortgage and Wells Fargo. Alaska USA is a credit union owned by its members. Residential Mortgage is owned by Northrim Bank and Wells Fargo is one of the largest publicly traded banks in the U.S. Many mortgage lenders end up selling the servicing of the mortgage to Wells Fargo which is how they make part of their profit. Profit also comes from the difference in rate from their pool of available funds versus the rate they charge the borrower. The mortgage originator, the person you submit your application to online or meet with personally, is usually on a commission and receives a portion of the loan origination fee as their compensation. In that regard, they are like Realtors and are paid only if the transaction closes and records. Here in Alaska a popular business model is for mortgage companies to be imbedded within a real estate brokerage under an office lease and market service arrangement. Any financial arrangements between the real estate brokerage and mortgage lender needs to be fully disclosed to a buyer.

There is also growing online competition for mortgages. Anecdotally, one escrow closing officer recently reported that 25% of their closings are now coming from online lenders like Quicken Loans, Inc. Realtors used to bemoan working with online lenders but over the past eighteen months, online lenders have learned how to better communicate with local Realtors and their transaction coordinators. What they don’t understand, however, are some of the local escrow closing holdbacks for new homes.

Doing a little comparison shopping never hurts. Think of it this way. You are not only buying a home but also a mortgage.