The Dangers of Interest Rate Myopia in Choosing a Lender

May 4, 2010

Finance

Chicago in a Golden Sunset

Chicago in a Golden Sunset

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.

We would like to thank OZinOH for kindly sharing today’s photo via the Creative Common’s License.
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About Doug Katz

As the Senior Mortgage Banker and Sales Manager for Chicago Bancorp, Doug not only originates loans for his personal business, but also oversees affiliations with banks and other financial institutions that depend on Chicago Bancorp to meet their client’s lending needs. In this role, Doug directs the day-to-day mortgage sales operations of over 25 branches in a multitude of Chicagoland’s diverse communities. He brings to these relationships a wealth of industry experience and a dedication to an exceptional client experience that has established Chicago Bancorp as Chicago’s pre-eminent mortgage solution providers. Prior to joining Chicago Bancorp, Doug attended and graduated from West Point. Upon graduation, he was commissioned as an officer in the United States Army Artillery, where served 5 years in numerous roles and in various deployments include service in Kuwait. In addition to his Bachelor’s Degree from West Point, Doug holds an M.B.A. from Loyola University Chicago, where he was also inducted into the Beta Gamma Sigma Honor Society. He also served as President for the West Point Society of Chicago from 2003 to 2005 and still serves on the Board of Directors. When not working, he spends his time with his wife and three children in their hometown of Oak Park, as well as pursuing his passions for fitness, cooking and the banjo. Doug can be reached by phone at 312.738.6079, by email at doug@chicagobancorp.com, on his own blogs, BankerDoug.com and Vet Money Matters. He’s also on LinkedIn.

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2 Responses to “The Dangers of Interest Rate Myopia in Choosing a Lender”

  1. Randy Whiting Says:

    Good info – You mentioned a possible “surprise” during the transaction from an inexperienced lender and also that if a lender could not give an answer to your satisfaction you should move on, with the truth in lending statement is this even a concern?

  2. Doug Katz Says:

    Great question. In short, surprises are still possible. While the Good Faith Estimate and Truth in Lending do provide a great deal in protection from a cost standpoint, they do not protect against underwriting guideline issues that can kill the deal. I was referring more to this type of situation. Ultimately, it is the job of the lender to anticipate these potential landmines and to navigate a path around them.

    I should add that it is still possible to have cost aspects of the deal change during the process on a limited basis. These are called change circumstances and are completely allowable. Think of it as the lending equivalent to a change order. A lender, however, should make every effort to articulate what could happen early on so that if and when a change circumstance occurs, it is not a complete surprise.

    On my Good Faith Estimates, I personally disclose all of the possible costs that could be incurred by the borrower and then I fully explain that a great deal of the costs will likely not apply to the transaction. In a sense, the Good Faith Estimate becomes a not to exceed document. While this makes for a seemingly high overall transaction cost, my borrowers are rarely ever caught off guard by any changes from the original plan.