As competition heats up, banks and lenders will likely ramp up efforts to get their hands on your mortgage, using all types of pitches and gimmicks to separate themselves from the crowd.
But mortgages aren’t cool or exciting, so any funky stuff they come up with to sell you a mortgage is probably just a load of baloney.
For example, you might be offered reduced closing costs, a relationship discount, or a stuffed animal. Okay, that last one may only be a half-truth if you bring your kid with you to sign the paperwork.
You may also be told that certain fees will be waived, or that they’ll lock your mortgage for free. Sadly, most of these “fees” don’t tend to exist in the real world, so you have to question whether you’re actually getting anything at all.
All the major players do it, including Wells Fargo, Capital One, Chase, Citi, Discover, Costco, etc.
The smaller guys probably don’t offer special discounts or fancy marketing, though that doesn’t mean they won’t throw some nonsense your way in a different form.
Look at the Big Picture
When shopping for a mortgage, it’s important to look at the interest rate and the fees you must pay to acquire that rate.
If you’re focused on $500 off closing costs, as opposed to your mortgage APR, you’re missing the point.
The same goes for a relationship discount. If you already do business with the bank that is offering to close your mortgage, and they agree to shave .125% (an eighth) off your mortgage rate, make sure it’s lower than competitors’ straight up rates.
Perhaps a good analogy to put this in perspective is the insurance industry, which is notorious for offering discounts for all types of silly stuff.
These days, the discounts are endless, and the marketing brains seem to be working around the clock to come up with more inane discounts to peddle to consumers.
But even if you receive 100 discounts, if your overall premium is still higher than what some no frills insurer is offering, the discounts mean squat.
It’s the same deal for mortgages – if some lender offers me a relationship discount, $1000 off my closing costs, or a stuffed pony for my niece, it won’t mean a thing if another lender is offering me a lower rate with fewer fees.
Get a Discount If We Screw Up
Perhaps the worst of the “discounts” are the ones that are only applied if the lender screws something up. Seriously?
Do you really want to go with a lender who will offer you money if they can’t get the job done on time?
That sounds like little consolation and a whole lot of stress, not to mention the fact that you’ll probably need to argue with them to get your credit.
So let’s get this straight – they fail to close your loan on time, and then offer you a credit, which will undoubtedly require you to send in even more paperwork and plead your case.
Good luck explaining that it was indeed the lender who was at fault, and not you or a third-party.
At the end of the day, you should do your best to avoid being sucked in by these marketing gimmicks, as enticing as they may sound.
Chances are the discounts are “priced in” somewhere else, whether it’s via a higher mortgage rate or added junk fees.
This is not to say that you should avoid the big banks in favor of a mom and pop broker shop, but you should take a hard look at a variety of offers to cut through the fluff.
Read more: Watch out for the adjustable-rate mortgage pitch.
Hi Colin, I used your charts about 15-year and 30-year mortgage differences a while ago…I ran across this post while doing some research…I love it! I’m going to link to it in a post of my own tomorrow. I’ll tag you on Google +.
Colin, great article. I see a lot of lenders way overcharging in fees, and then give a discount to make people think they are getting a great deal.
Or the famous ‘no cost’ loan that has a rate that is .375% to .5% higher than anyone else? Those people think they are saving $1,500, but in reality, will pay 10 times that in more interest over the life of a loan.
This is a crazy industry we are in.
True, though no cost can make sense if someone doesn’t plan to stay long. A lot of folks don’t hold their mortgages very long…