There ought to be a warning label on mortgages: “These rates and terms could be hazardous to your financial health.” That’s because most people shopping for mortgages think that they are as simple to buy as airline tickets. You go online, search for the names of the companies that advertise the most on the radio like Quicken Loans, put in your information, and three minutes later, blast-off—you’ve got your mortgage.
The results aren’t as immediate as the commercials make it seem, as homebuyers still have to go through the typical loan process of communicating back and forth with representatives and sharing documentation and information. The problem with the process portrayed by commercials is that it essentially encourages people to not shop around for their mortgage. What often happens as a result is that the terms you receive may well be worse—or even far worse—than what you could have gotten had you done things the right way. That’s not a huge issue if you’re buying an airline ticket from New York to Los Angeles. But the ramifications of making a bad choice on a mortgage can haunt you for the next 30 years.
So how do you do it the right way? Mat Ishbia, President and CEO of United Wholesale Mortgage, the largest non-bank mortgage lender in America, in terms of purchase volume, offers consumers four counterintuitive thoughts about how to get the best mortgage. He shared those thoughts with me in a recent phone interview.
1. It’s cheaper to use the middleman.
Most people think that they will get the best rates and terms by dealing directly with a large bank or retail lender such as Quicken Loans. The reality is that you’ll always get the best deal by going through a middleman, an independent mortgage broker.
“This is one area of life where you want to work with the middleman,” Ishbia says. “Your bank and the radio advertisers are not going to shop around on your behalf. The middleman will. Whatever else you’re buying, you get the best deal if you go get it yourself. But with home mortgages, it’s exactly the opposite. The middleman gets you the best deal every time and has access to wholesale rates, which are oftentimes lower than what someone can get by going directly to a retail lender.”
For instance, you can get a mortgage at Quicken Loans with a lower interest rate and cheaper closing costs by going through a mortgage broker than you can by going directly to Quicken. Specifically, looking at a snapshot of rates on December 11, 2018, Quicken’s retail rate for a 30-year conventional loan at $200,000 was 5.125%. Meanwhile, a borrower could get that same $200,000, 30-year conventional loan from Quicken, through a mortgage broker, at a 4.75% interest rate. Breaking down numbers to comparing payment differences and finances charges between the two options, you would save nearly $32,000 over the life of the loan by getting your Quicken Loans mortgage through a mortgage broker, than by going to directly to Quicken.
The same company would ultimately be servicing your loan, but mortgage brokers have access to discounted wholesale pricing – and that savings is passed down to the borrower.
2. Never put down 20%.
“Everybody tells you to avoid PMI, the insurance you have to buy if you make less than a 20% down payment on a home,” Ishbia says. “Counter intuitively, you actually get a better rate if you only put down 3% or 4% or 5%. First, you get to keep that 15% that you would have put down—that’s cash that stays in your pocket. You can invest it. You can buy furniture with it. You can do whatever you want with it. But once you put it into the house purchase, the only way you get it back is by borrowing it from the bank. Why not just keep it in your pocket?
“Most people are afraid of spending on PMI. But it’s actually a minuscule amount compared with how much cash you get to keep. And remarkably, Fannie Mae and Freddie Mac actually see loans with PMI as less risky than loans without it. This means that you end up getting a better rate if you put down 3% or 4% or 5% than you would if you put down 20%. Most people never realize that.”
3. Don’t make interest rates your top priority.
“I know it sounds crazy,” Ishbia says. “But your focus should not be on interest rates. Instead, it should be your monthly payment. Don’t say, ‘I want to buy that house for $350,000 and I want to put 20% down.’ That’s backward. Instead, figure out how much you can afford each month on your monthly payment.”
4. Get your mortgage lined up before you start home shopping.
“What normally happens,” Ishbia says, “is that people start looking at houses, find something they love, and then struggle to figure out how to pay for it. The smarter option is to get your mortgage lined up first. That way, you know just how much you’ll be putting down, just how much you can afford, and what your monthly payments will be. Otherwise, emotion will be driving the bus, and that’s the easiest way to drive your personal finances over a cliff. No house is worth the lack of sleep you’ll have wondering how you’re going to pay for it!”