The theory of money: 8 logical methods on how to compare mortgage lenders


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Ask a Lender
September 18, 2017 | Updated October 5, 2017


Key Points

Use logic to compare mortgages

  • You can use logic and critical thinking in choosing a mortgage.
  • Simplified social and economic theories should guide this financial decision.
  • Time is money, but time used well can save money.

When you buy a house, you legally commit to a long-term investment. That said, when it’s time to get a loan, statistics show that many of us use more brainpower and logic picking out today’s $5 breakfast cereal than we do in choosing a 30-year, several-hundred-thousand-dollar mortgage.

Sometimes our perceived logic steers us badly (i.e., nobody shops around for mortgages). Other times, it is flat-out wrong (i.e., all mortgages are the same). A little research mixed with a touch of critical and theoretical thinking can help you change that, and help you get on the path to mortgage nirvana.

Below are eight theories to help logically guide you in your comparison shopping.

1. Savings and the instant gratification theory

Most of us want to hold onto our hard-earned cash. Yes, research takes time and time is money, but finding a way to save half a percentage point in interest gives you immediate savings. Example: You want to buy a $200,000 house, with a 30-year mortgage and a fixed interest rate. With an interest rate of 4 percent vs. 4.5 percent, you’ll save about $60 a month on your mortgage payment.

2. Savings and the butterfly effect

Some would pooh-pooh a trifling $60 a month. But a small change can have long-ranging effects. If you have that lower rate, at the end of five years, you’ll have saved about $3,500, and will have paid $1,400 more on the principal balance. Threefold savings: more money in your pocket every month, you’re paying off your debt faster and you’re building more equity in your home.   

3. Interest rates and chaos theory

Do a simple search on the day’s mortgage interest rate, and you’ll quickly see it isn’t a simple number. There are interest rates and annual percentage rates. Rates for 15-year and 30-year terms. There are conventional and conforming, nonconventional and nonconforming mortgage rates. Government and jumbo, ARMs and fixed-rate loans. All are different, all have different rates. Different banks and lending institutions have different rates. And all of these rates can change from one day to the next. Research and knowledge will help you find savings in the chaos.

4. Interest rates and the theory of human nature

Now, we know that rates are all over the map, with the upper and lower limits generally defined by market conditions and regulations. How do lenders determine the rate for your loan within that spread? Simple. They look at the financial human element, specifically the nature of your financial history, your ability to pay and whether you responsibly pay your bills. Your credit score tells lenders a lot about your income and money habits: low scores indicate you’re a risk and so you may be denied a loan or face higher interest rates. High credit scores indicate you’re a safe bet, so lenders offer more favorable rates and terms.

5. Interest rates and the theory of logic

Knowing that lenders look at your individual credit history to determine rates, logic would dictate that, because all lenders see the same financial data, all would offer you the same rate for the same type of loan. That is, in reality, highly illogical. Say you have a great credit score of 750. You want a $200,000, fixed-rate 30-year mortgage. A quick survey of a dozen financial institutions shows interest rates of between 3.75 percent from a state-chartered bank to 6 percent from a national direct mortgage lender.

6. Interest rates and gamification theory

When you apply for a mortgage, lenders run a credit check to help them consider the variables and risk factors to determine your mortgage’s rates and fees. Each lender has its own priority list and formula to weigh those factors. In addition to your credit score, they weigh variables such as your debt-to-income ratio (what you owe vs. what you earn) and how much money you offer for a down payment, as well as other factors. You can improve your odds for a better rate by boosting your credit score, cutting you debt-to-income ratio, and offering a higher down payment.

7. Lender comparisons and the theory of self-efficacy

Self-efficacy, as defined by psychologist Albert Bandura, is your belief in your ability to succeed in specific situations. Therefore, the logical conclusion is for you to take a little time to research at least a few lenders. You don’t have to fill out a bunch of paperwork for each lender you shop. Instead, write up a simple list of what you need and what you want. Take that to a few lenders — the CFPB suggests at least three, and include loan officers and mortgage brokers — and pose the question: “What can you do for me?” Lenders will offer you a firm estimate and present various options they can offer you.

8. Lender comparisons and the theory fight of flight

When you’re researching lenders, remember that, for them to be successful businesses, they need to make money. That doesn’t mean you should bow to their sky-high rates and convoluted fees. Get your bids and review your options, considering terms, rates and fees, as well as your comfort levels. You should also try to negotiate between your top choices. Lenders may be willing to match a competitor’s origination fees, for example. Bottom line is to find a lender you feel comfortable with. If they won’t listen or are too pushy, keep shopping. Lenders need new customers and should treat you as if you’re worth the effort to earn your business. Never sell yourself short.


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