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millennial mortgage shopping

Three reasons millennials don’t shop for mortgages

It never fails.  Millennial buys a home, thinks all is good in the world and only then realizes they just got taken to the cleaners on their mortgage.  They are then stuck in a loan with an unnecessarily high payment every month for years to come. How did they end up in that situation?  Why didn’t they take time to explore mortgage options?  Here are the top three reasons millennials don’t shop for mortgages.

1. “I was scared by my real estate agent”

A millennial may never admit it, but they are subject to human emotions just like the rest of us. When it comes to a big purchase, such as a home, it is human nature to want to avoid risk. Some agents take advantage of this and inject questionable statements like this:

  • “Our in-house lender is always the best.”
  • “Her service is great and she’ll be at closing, nobody else ever does that.”
  • “Those online lenders, stay away!  They’ll never close on time!”
  • “Our in-house lender will shop rates for you, you don’t need to.”

Facts: Discouraging a home buyer from mortgage shopping is 100% unethical – and could even be illegal!  There are many incredible loan originators out there and many attend closings regularly. A single lender or broker can’t shop mortgage rates for you (learn why).

To understand why a real estate agent may steer a borrower to a specific lender, let’s follow the money!

The money trail

A real estate agent makes money when a house is sold or bought via commissions. The rate and loan program obtained by the homebuyer is irrelevant to the real estate agent’s income.  Their primary goal is to get the transaction done.  Until that moment, they haven’t earned a penny.

Additionally, many real estate agents have co-marketing agreements with specific mortgage lenders, brokers or loan originators. If these mortgage professionals don’t see an ROI on their investment of marketing dollars, the real estate agent stands to lose at least part of their marketing presence.  Therefore, the real estate agent wants to “feed” the mortgage professional to continue the financially beneficial co-marketing arrangement. 

With these in mind, is it any wonder that an agent will aggressively push you to a specific lender or mortgage broker?

Not all agents are the same

While many tech disrupters offering flat fees or “no-commissions” on real estate sales solves some of the problems, one major money problem remains.  Despite the removal of commissions, real estate agents may still be receiving funds from a mortgage broker or lender in the form of a co-marketing agreement or “MSA”.  This means they will still push a homebuyer to a specific lender, robbing them of the opportunity to shop for their mortgage.

How can this problem be solved?  You simply need to find an ethical real estate agent who isn’t “hooked” on the money coming from one specific lender.  Before you legally engage with any real estate agent, simply ask this question: “Do you receive money from any specific mortgage broker or lender?”

If the answer is “yes”, walk away and find someone else who will be just as interested in helping you save money on your mortgage as they will in finding you the house of your dreams.

2. “I used an app”

Every lender claims to have the tech to close your loan faster than you can say “mortgage transaction.” Can they really?  And if they can, who is actually the winner of this perceived huge investment in technology?  Do lenders make these massive investments purely for the consumer experience?

No, they sure don’t.

Fact: The shorter your loan is in processing, the lower the likelihood you’ll shop around or be solicited by other lenders and brokers.

Avoiding competition is a good thing for mortgage lenders and brokers, but not consumers.  When a millennial decides to not consider alternatives, voluntarily or involuntarily, the lender or broker wins.  The government has been fighting to help consumers shop for years, instituting more robust disclosure time periods and new documents – but the tech industry has quickly outpaced any government intervention.

Tech helps you shop too

Fortunately, the digitization of mortgages has made mortgage shopping easier provided you can avoid the common pitfalls.

Pitfall 1: Sharing your name, email and phone number with shopping sites who send it to multiple lenders.  This will get you bombarded with calls and you’ll wish you never uttered the words mortgage.

Pitfall 2: Shopping over the course of several days.  Rates change every day, so an apples-to-apples comparison is always essential.

Pitfall 3: Shopping while uninformed.  We tend to consider the use of a mortgage concierge a good thing but hey, we may be biased 🙂

Solutions to mortgage shopping

So, how can this problem be solved?  Fair warning, the answer may require that you have a conversation with an actual human at some point who isn’t your parent or friend who doesn’t know a lick about mortgages.

Solution 1: Our particular solution is to use MortgageCS’ concierge program which is free and provides education and insights from day 1 of your shopping through your loan closing.

Solution 2: Other options are becoming a mortgage expert by holding numerous conversations with many banks, lenders, and brokers all while resisting the urge to have your credit pulled numerous times and getting bombarded with follow-up calls and emails.  Grow thicker skin and don’t be afraid to say “no” and you’ll be all set here.

3. “I am subject to advertising”

It may be hard to admit, but marketing messages can impact everyone – even tech-enabled millennials.  From TV spots to billboards and creative event sponsoring, mortgage companies are investing more and more each year to maintain scale and keep their operations growing.  After all, they have an investor base or shareholders to keep happy.

Remember this: A mortgage is a single transaction, creating a predetermined amount of income. It follows that a company with lower costs and all else equal could deliver a better mortgage rate and fee structure.  While company size and other factors can sometimes influence this, you should read this first: Do mortgage brokers act in their customers best interest?

Now that you know the three reasons millennials don’t shop for mortgages – you can ensure you don’t fall victim to the same influences!

Share this to help your friends – they can use their savings to take you to a nice dinner one day!

mortgage brokers

Do mortgage brokers act in their customer’s best interest?

By definition, a broker is a person who arranges or negotiates something like a settlement, deal, or plan. It follows that mortgage brokers arrange or negotiate a mortgage.  But what does “arranges or negotiates” really mean?

More importantly, does a mortgage broker always act in the best interest of their customer, the mortgage borrower?

These questions come up whenever we meet with financial advisors. Understanding the answer (hint: it is not a simple yes or no) is essential for a fiduciary advisor who wants to remain, well, a fiduciary advisor. Failing to understand this answer results in failing to look out for the best interest of your client. 

Let’s examine how mortgage brokers come up with their mortgage rates.

How mortgage brokers come up with rates

A mortgage broker will compare various wholesale lenders when examining loan options for a potential customer.  Wholesale lenders (which have approved the mortgage broker as a partner) will supply rate sheets or the raw data to populate loan pricing software.

In this sense, wholesale lenders are just like wholesale suppliers in a retail market. They can have specialties such as “jumbo loans” and rate or pricing differences will certainly exist amongst them.

The graph below represents the wholesale price from three different wholesalers available to a mortgage broker. For our purposes, we’ll imagine there are just three different wholesale lenders being considered for a particular loan.  Truth is, there could be many more options considered by one mortgage broker.

Mortgage broker wholesale pricing

To grasp the concept of how this process works we are omitting the actual interest rates.  Rather, we are going to focus on their relative position to each other. Note the Y-axis is simply “Interest Rate” and void of specific numbers.

In the case above, Wholesale Lender 1 is offering the lowest wholesale rate given the mortgage customer’s credit, income, and other criteria. In contrast, Wholesale Lender 3 is providing the highest wholesale rate.  Lower rates are always better when other things such as origination fees and discount points are held constant.

With an understanding of the mortgage broker’s “suppliers,” let’s move on to how the mortgage broker makes money.

A mortgage broker adds margin

A mortgage broker will add a retail margin, or markup, to each wholesale rate.  These two items, when combined, determine the final interest rate presented to the mortgage customer.

Industry compliance and several other factors ensure that a specific mortgage broker earns the same markup on each loan they could offer.  As a result, the same margin is added on top of each wholesale rate.

Mortgagebrokeraddsmargin

With the retail margins added to each wholesale price, the relative attractiveness does not change. Wholesale Lender 1 + broker margin is still the most attractive loan option.  Said another way, this wholesale price and the margin combined will result in the lowest rate for the mortgage customer.

A mortgage broker presents their best option

Mortgage brokers want to present their best option to increase their chances of winning the loan business. They are indifferent as to which option they provide because they generate the same margin in all cases. In this sense, a mortgage broker does “shop” rates in some way. But there is MUCH more to the story.

Mortgagebrokersbestoption

The fact is, there are many wholesale lenders and a mortgage broker selects a certain number with which to partner. While a mortgage broker may have access to many wholesale lenders, they will NEVER have complete representation.

Other mortgage brokers have their own best options

Each mortgage broker has an individual set of wholesale relationships. These relationships can be based on familiarity, proximity, or any other factor.

Additionally, each mortgage broker must be approved by a wholesale lender in order to offer their products and terms. Some wholesale lenders enforce minimum production requirements in order for mortgage brokers to remain “active” with them. Further, certain mortgage brokers can receive better/worse wholesale pricing based on a range of factors including quality of submissions and volume of transactions monthly/quarterly.

As a result of these factors, each mortgage broker will have access to a “best wholesale price.” Said another way, they will each have a different starting point with which to build their retail rate.

Otherbrokerswholesalelenders

Mortgage Broker 1 has presented the wholesale price that is lowest from his stable of options. Mortgage Broker 2 has access to a lower wholesale price. Mortgage Broker 3 has access to a less favorable wholesale price – the worst of the bunch.

If we assumed (wrongly, btw) that retail margins are all the same, then we see (below) how a wholesale price is related to a lower rate.  In these cases, the wholesale price is the main determinant of interest rate for the consumer.

wholesalewithretailmargin

When presented with these options, we should choose to work with Mortgage Broker 2.  Due to their exclusive access to the lowest wholesale price (amongst the three), they will provide the lowest interest rate.

A lower interest rate results in lower monthly mortgage payments – who wouldn’t want that?

Retail margins differ between mortgage brokers

Mortgage brokers generate revenue only when they produce loans. All expenses, such as loan officer commissions, office overhead, and marketing/advertising, are paid for from this transactional revenue. As a result, each mortgage broker requires a different retail margin to maintain profitability and the range can be significant.  

Operational overhead is one of the most common reasons why retail margins range. A mortgage broker with a large executive team (drawing hefty salaries) will result in the need for larger retail margins.

A mortgage broker paying a hefty monthly “marketing expense” to a real estate office can also be a contributing factor. These monthly fees, called MSAs, are masked from compliance regulators by associating them with “joint marketing activities.”  While the legality of them may be increasingly questionable, the funds required to repay this large expense increases the retail margins charged.

Applying the logic from above, let’s take a look at how our Mortgage Brokers made out in a competitive environment.

DifferentRetailMargins

Mortgage Broker 2 ends up being the worst choice for a mortgage borrower.  The large retail margin results in the highest interest rate compared to both other options.

Mortgage Broker 3 ends up with the lowest rate for a mortgage borrower.  Their low retail margin means they can provide the best interest rate, resulting in the lowest payment compared to the other two options.

Shopping between mortgage brokers is vital

According to the Freddie Mac April 2018 Insight, shopping just one additional source for a mortgage can result in savings approaching $2,000.  Shopping up to five sources can result in savings that approach $4,000.

While these numbers may seem significant, we see rates vary by as much as 0.50% between mortgage brokers. This difference presents a more significant opportunity than the Freddie Mac April Insight suggests.

Because mortgage brokers can’t represent every single wholesale option and inevitably have a differing retail margin, they can only partially act in the best interest of a customer.

Despite advances in technology and efficiency, mortgage shopping is a vital part of the mortgage process and should be done in each and every instance.

Mortgage Shopping Confidence from MortgageCS

Gain mortgage shopping confidence

Mortgages can seem complicated and intimidating, particularly in a world when we can “one click order” online.   How can you find out what you don’t know…but really should? How can you increase your mortgage shopping confidence?

When consumers shop for mostly anything, they evaluate the item or service they’re considering based on a predetermined set of criteria. Some considerations are easy, while others are more complicated. Mortgages tend to fall into the latter category. This is typically due to the intimidation factor and the perceived complexity of the product.

Mortgage loans come with an inherent, internal language the everyday consumer rarely encounters. If you wandered around a mortgage company, you’d hear phrases such as, “Where’s that VOD?” Not surprisingly, many of these phrases would be meaningless to you.

On the other hand, when someone decides they want to go out for a coffee, the choices are a bit more familiar sounding, and the decision most likely boils down to a matter of location and price. It’s pretty simple. While loan officers might wish the mortgage process were as easy as ordering a cup of coffee, it’s typically not.

Due to the varying factors of a mortgage transaction, borrowers should compare lenders based upon quoted interest rates and responsiveness, quality and trust. Consumers should approach mortgage education by explaining their needs and what they are looking to accomplish.

In this manner, they can find out more about the lender’s mortgage process and how loans are issued.

Finding a good mortgage loan officer

There is plenty of material online about how to shop around for the best deal on a mortgage. Certainly you want the best rate at the lowest cost, but you also need to consider the reputation of the companies you’re interviewing. But perhaps the process needs to be reversed.

When you call a loan officer and ask about a rate quote, the loan officer knows there’s competition.  He then provides the best available offering without considering all the details. The loan officer doesn’t have any reason to thoroughly evaluate your situation, so he falls into an all-too-familiar trap.  He provides a quote to win your attention potentially resulting in a bait-and-switch.

Here’s the problem with that: The quote alone doesn’t help lift the veil off the mortgage process or account for long term needs. It won’t ensure consumers make the right loan choice.  It won’t ensure that you come away from the closing with a clear understanding of what’s just happened and why. Yikes!

How can you, as a consumer, know what to ask to gain mortgage shopping confidence?

The surest path to pure mortgage nirvana is by communicating openly with the loan officers to facilitate learning early. This will be the best way to increase your mortgage shopping confidence.

Instead of considering only the interest rates, you should include a description as to what you are looking for.  Here’s an example: “Here’s my situation. I want low monthly payments, but I also want to save on long-term interest. I’m retiring in about 15 years and I want to be mortgage free.”

With this information, the loan officers know to quote you a rate on a program that matches your goals.  Surprisingly, that doesn’t necessarily mean a 15-year fixed rate loan.

A loan officer could suggest a 20-year loan, and set up a payment schedule that allows you to prepay just a little bit each month.  This would give you the security of a lower payment if ever needed. The extra payment would be applied directly toward the loan balance and would not go to interest.

Did you even know a 20-year loan was an option? Probably not, because most information you read is about either 30- or 15-year fixed rate loans. Instead of asking for a 15-year fixed rate and the associated fees, try explaining your current situation and what you want to accomplish.

Experienced loan officers know to include this information automatically, but unfortunately most get into a rate-and-fee game, leaving borrowers confused.

Another mortgage shopping example

“I need a quote for a duplex I’m thinking of buying.”

The loan officer answers and even sends a cost estimate showing how much down payment you will need, along with a list of anticipated closing costs. You get your quote, hang up and dial another mortgage company. Doesn’t that sound like fun? NOT!

Instead, how about saying: “I’m going to buy a duplex and live in one of the units. The current rent for each unit is $1,500 per month. I want the rental income to cover my mortgage, property taxes and insurance plus a little extra cash each month.”

Now, that’s a plan. Your loan officer will explain your options and what your monthly payments will be. He’ll also help structure a prepayment plan to retire the mortgage sooner, saving you long-term interest.

The loan officer in the second scenario will explain why each option is offered and how it meets your requirements. You may not have known how much your payments would be or whether the rental income could cover your mortgage payments.

You also may not have known your interest rate would be better because you plan to live in the property rather than renting it. By the end of the conversation, you’ll know how mortgages work and how they can be crafted around your exact situation.

Mortgage Shopping Confidence

By communicating your goals along with your rate request you’ll WIN at this process we refer to as the mortgage maze. You’ll also end up comfortable with the loan program you’ve selected. Now THAT is a WIN because you’ll increase your mortgage shopping confidence!

 

The Journey to Solve the Mortgage Shopping Problem

Our story began nearly two years ago when we wrote a business plan to improve the mortgage shopping process for consumers. The journey to create an unbiased mortgage-shopping platform that protects privacy and generates amazing results for families allowed us to confirm numerous hypotheses and learn some rather surprising facts along the way.  In addition to sharing these insights and other findings here in our blog, we’ll be posting stories from our various business interactions with Realtors and Financial Advisors as well as mortgage-related content.

Until now, there have been no easy options to shop, evaluate and select a lender, loan officer or loan program. If you recently obtained a mortgage for a home purchase or for a home refinance, chances are you used at least one online loan search engine, a spreadsheet, several emails chains, many phone calls, a few text messages and lots of time…LOTS of time. If you made the mistake of giving up your phone number and email address during your online mortgage shopping, you may still be getting calls from mortgage lenders – months after you closed your loan!

It is also likely that you felt a bit unsettled during the process of shopping and comparing mortgage loans. Who could blame you? A mortgage is a big deal and with the confusing terms, jargon filled disclosures and range of products and options, it can be nearly impossible to ever feel confident in a decision.  There seems to always be a “but what if I were to…” scenario, and let’s face it: you don’t know what you don’t know.

This experience and these feelings are not unique to your last mortgage transaction.

This pain is felt by thousands of people on a daily basis – and it is what we solved for when we designed and built MortgageCS, the Mortgage Concierge Service.

We have lots more to share, so be sure to stay in touch with us right here on MortgageCS and through Twitter, LinkedIn or Facebook. Our founding team has been in the mortgage business since early 2002, and involved with consumer focused technology platforms since 2000. This expertise, when combined with our recent findings and listening to our users, will be leveraged to continually improve the MortgageCS platform.  We are glad you are here – reach out at anytime, we’d love to hear from you.