The aim of this project is to analyze the mortgage rates from five different online mortgage lenders. By converting the quoted rates into Effective Annual Rates (EAR’s), it will be possible to identify the cheapest rate and its impact on the cost of buying a home. This will also take into consideration time to maturity. According to Lee (2006), the Effective Annual Rate is calculated as follows:
The online mortgage lenders selected for the exercise include: LendingTree.com, CitiMortgage.com, gmacmortgage.com, Quicken Loans, and eloans.com.
The table shows that the mortgage lending rates from CitiMortgage.com are relatively expensive for both the 15 and 30 year lending periods. This is because the EAR calculated is the highest compared to the other online mortgage lenders: 3.445 percent for the 15 year lending period and 4.074 percent for the 30 year lending period.
The online company with the cheapest lending rates, taking in consideration the EAR, is LendingTree.com. It offers 2.29 and 3.43 percent on the 15 and 30 year lending periods, respectively. Considering the cheapest combination across the online mortgage lenders, one would consider taking a 30 year mortgage from either eloan.com or LendingTree.com and a 15 year mortgage from LendingTree.com.
On the basis of EAR, the cheap rate makes sense as it indicates the interest rate that will actually reflect on the mortgage. An investor selecting a 30 year mortgage clearly indicates that he/she believes that the monetary value will remain somewhat static. By doing so, the amount of money for mortgage repayment will not to be greater than the expected.
Three common mistakes that most homebuyers make when looking at quoted mortgage rates are the following:
Overreliance on the quoted mortgage rates to make decisions on buying a house, which has disappointed most customers. The quoted rates should only be used as a shopping tool as most lenders do not provide other costs involved. Some of the hidden costs include: credit reports fees, appraisals fees, document preparation fees and pest inspections.
Shopping over several days is also a mistake made by most home buyers. The buyers need to know that rates change on a daily basis. The solution is to obtain quoted rates from different lenders on the same day, to do the necessary comparison, and then select the best lender.
Another mistake is the failure by the buyers to obtain a mortgage pre-approval letter. This is because most home buyers fail to understand the difference between prequalification, which is not verified, and preapproval. The home seller will be willing to attend to an offer accompanied by the preapproval letter.
Why do the different lenders have different rates?
It is assumed that different rates are due to various factors specific to each lender. One of the reasons is funding the costs that the lenders incur in raising funds to lend. Another reason may be due to the operating costs incurred while servicing the mortgage. This includes payment of wages and salaries. The rate is also influenced by risk taken by the lender in providing the mortgage. In the long run, the lender also has to ensure that the profit margin gained from the loans is adequate compared to the capital investment.
The difference of rates has major influence on the cost of buying a house. The lenders have to ensure that they grow the market share by ensuring the quoted rates and customer service qualities are at their best. Otherwise most customers will search for lenders who provide the cheapest rates with excellent customer service.