Let me begin by saying that interest rates are important to any real estate transaction. To say otherwise would be naïve. But too many times rate emerges as the primary or even the single driving factor in the decision of which lender to choose. This low cost approach can be a very perilous road when taken with complete disregard to the overall requirements for the transaction and the individual delivering the service.
First and foremost, you need to look at the overall cost of the deal and to understand any lender you choose will get paid one way or the other. The more in fees you pay, the better rate you can typically secure, but that may not be what is truly the best for you. If you focus too much on rate, an unethical lender can interpret that as a desire for a low interest rate above cost and the lender will then structure the loan accordingly. The end result for you could be a fee-heavy loan that could cost you more overall than a loan at reasonable market rates with typical fees.
Secondly, you need to understand that no two transactions are the same. Pricing for all loans is based on risk, and banks price to account for the subtle changes from client to client that contribute to the risk. Like a restaurant menu, the pricing for loans is subject to a list of factors that add or reduce the risk. This affects the price. Everything from the property type to the client credit score can and does have a material effect to the final rate that you will pay. Often times these items and the associated adjustments are omitted by inexperienced, careless or unethical loan officers who will, in turn, show a lower price for the loan than they can truly deliver. The end result is an unwelcome surprise during the transaction. I always recommend simply asking any lender who emerges as a low cost outlier from the rest how they are delivering such a good rate. If they cannot answer the question to your level of comfort, you need to reconsider using them.
Finally, you need to consider service and the fact that you will get what you pay for. A low cost lender may offer what seems like the best price, but all too often this price comes at the expense of service. You should not take this fact lightly as the experience that you receive will depend greatly upon this individual. You should test the lender to see if their level of service and their abilities are up to your expectations. I recommend some simple questions for you to ask yourself and the lender to be able to assess your choice of potential lenders:
- How quickly did they first get back to you?
- Do they set reasonable expectations regarding timelines and capabilities?
- Do they answer their phone after hours and on weekends?
- Do they communicate well up front and will they likely continue to communicate throughout the process?
- Did they explain the pros and cons of a particular loan structure to you?
- Do they give you negative, but honest information while structuring the loan?
The answers to these questions provide you the proper context to evaluate whether your loan experience will be as smooth and painless as possible or a nightmarish marathon of disappointment.
All in all, you need to look at the loan process as any other shopping venture. I rarely speak to anyone who does not fully evaluate all the factors associated with other large purchases. From automobiles to HD TVs to work by contractors, I see a consumer behavior rooted in extensive research and careful contemplation on not only obtaining the best deal, but also the dependability of the vendor and the overall value involved. Somehow this is often missed with loans, but if you slow down and take the time to do this with a real estate transaction, you will rarely, if ever, go wrong.