Beware finding a lender online

The Web can be useful in mortgage shopping, but it's not for everyone

On The Money

Your Money

August 15, 2004|By Lorene Yue

When lenders ushered in modern online banking in the mid-1990s, they envisioned thousands of consumers logging on in their pajamas, coffee cup in hand. The prospect of applying for a mortgage from the comfort of your home at any hour of the day was supposed to revolutionize lending.

While home loans have taken off - a record $3.8 trillion in new loans were made last year - getting one remains a mystery to some. But the online concept is catching on. About 18 million households have applied for some type of loan online, experts say.

The numbers aren't huge, but they are significant.

"By human behavior, applying for a loan is a negative psychology," said Jim Bruene, editor of Online Banking Report, a financial-services newsletter based in Seattle. "It's not something you want to do."

Lots of us have questions about how it works. Here are some answers.

Is it worth it?

It is if you know what you're doing and what you're looking for. Hands down, the Internet is great for getting a 30-year fixed-rate refinance loan, said Michael Schwarz, regional manager for First Mortgage of Illinois in Bloomingdale. But if you're a first-time homebuyer or a credit-challenged borrower, online sites won't provide the one-on-one counseling you might need.

Whom am I dealing with?

There are single lenders such as online arms of existing banks, but not all of their Web sites might provide a tailored quote over the Internet. There are auction sites, which basically sell leads (your loan request) to other lenders. And there are referral sites that don't make loans but post rate information from various lenders.

"That information is not reliable" on loan referral sites, said Jack Guttentag, who runs the Mortgage Professor's Web site (www.mtgprofessor.com). "They cheat because the prices they put up there aren't the prices they are going to make the loans at."

Will I get a better rate online?

Conventional wisdom would suggest that a branchless bank with lower overhead costs would pass any savings on to you. That might be true in some instances, but don't expect to save a lot.

It's a trivial difference, said Frank Trotter, a group president of Everbank.com in Jacksonville, Fla. You might see a difference of an eighth of a percentage point in the annual rate among the top rates of all lenders.

Don't be afraid to start with your bank, said James Van Dyke, founder of Javelin Strategy & Research, an electronic financial-services consulting firm in Pleasanton, Calif. It might give you a preferential rate for being a customer.

Advertised rates aren't guaranteed. Fees, points and closing costs can drive up the annual percentage rate, and sneaky lenders will advertise a low rate, then run up your monthly payment by tacking on high fees and closing costs.

Use restraint when asking for quotes. Each request can ding your credit score, which can in turn raise your rate.

Which route is safer?

It's a wash. You'll generate a paper and electronic trail going through either route.

"No matter how you do it, you need to trust the company that stands behind the services," Van Dyke said. "You just can't go with the best deal."

Avoid clicking on a link embedded in an e-mail solicitation. Leave a Web site immediately if there is no contact number or office location. Originate your own rate searches and poke around the Web site. Look for a contact number and call it.

And guard your personal information until you've checked out the lender.

How do I know if the lender is legitimate?

You can check out the financial status of many lenders at the Federal Deposit Insurance Corp.'s Web site, www.fdic.gov.

Call your state regulators if it's a broker to see what licensing is required, if any, and whether the company is approved to do business in your state.

Call the Better Business Bureau to see if any complaints have been logged against the company. Don't forget to call the lender. If you can't find a working number, you might want to take a pass, regardless of how tempting the offer is.

Lorene Yue is a Your Money staff writer.

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