Mortgage Shopping: Tips + Mistakes to Avoid (Max Leaman)

The Common Mistake: Focusing Solely on Interest Rate

When borrowers first reach out, their primary question is often, "What is your interest rate?" However, interest rates should not be the sole focus when selecting a mortgage. Many factors influence the rate, and a borrower’s overall financial comfort should take precedence.

Instead of fixating on interest rates, borrowers should consider:

Maximum comfortable monthly payment
Total amount they are comfortable investing in the transaction
Debt management strategies

By addressing these aspects first, borrowers can structure a plan tailored to their financial needs and long-term goals.

The Importance of Debt Management

Debt management is a crucial factor in determining the right mortgage strategy. For example, if a borrower has $100,000 available for a home purchase, it may not be in their best interest to use the entire amount as a down payment. Instead, using a portion to pay off high-interest debt can lead to significant monthly savings.

A real-life case study:

A borrower was uncomfortable with a higher mortgage payment.
By reallocating funds, $50,000 was used for a down payment, and the remaining $50,000 paid off outstanding debt.
The total debt load was reduced by $800 per month, significantly improving financial flexibility.

Navigating Points and Their Implications

Borrowers often ask whether they should pay points to lower their interest rate. The key consideration is break-even analysis—the point at which the upfront cost of buying down a rate is recovered through monthly savings.

How Points Work:

One point typically equals 1% of the loan amount (e.g., $5,000 on a $500,000 loan).
Paying one point generally lowers the interest rate by 0.25% to 0.50%.

Break-Even Analysis:

A good rule of thumb is a 2.5-year break-even period:

If refinancing is expected within 12-36 months, paying points may not be worthwhile.
If rates remain steady, a break-even period of 2.5 years makes sense.
Borrowers should factor in future scenarios, such as refinancing, converting the home into a rental, or life events that may affect financial planning.

Loan Recasting vs. Refinancing Explained

Borrowers frequently ask about the difference between loan recasting and refinancing:

Loan Recasting

Involves making a lump-sum payment toward the principal.
The loan is re-amortized based on the new principal balance.
The interest rate remains unchanged.
Typically costs around $500.

Refinancing

A completely new loan is issued.
The interest rate and loan terms (e.g., 30-year or 15-year) may change.
Higher closing costs compared to recasting.

Borrowers should consider whether lowering their payment through recasting or securing a lower interest rate through refinancing aligns better with their financial goals.

Identifying Unscrupulous Lenders

Vet loan officers carefully—many may mislead borrowers by quoting artificially low rates that are either unattainable or require significant points to achieve.

Red Flags to Watch For:

Bait-and-switch tactics: Quoting a lower rate than the market average without disclosing conditions.
Frequent job changes: Loan officers who change companies every 1-2 years may indicate instability or performance issues.
Lack of transparency: Failure to provide clear explanations of rates, points, and loan terms.

How to Vet a Loan Officer:

Research online reviews – Look for consistent, positive feedback.
Check experience and longevity – How long have they been in the business?
Ask for referrals – Realtor referrals and recommendations from friends and family are the most reliable.
Discuss strategy, not just rates – A trustworthy loan officer will focus on the full financial picture.

The Value of Local Loan Officers

Choosing a local loan officer offers several key advantages:

Reputation & Accountability: Local professionals rely on long-term relationships with realtors and clients.
Title Company Coordination: Familiarity with local title companies streamlines the process.
Appraisal Quality: Local lenders work with appraisers who understand market nuances, reducing the risk of inaccurate valuations.
Faster Closing & Funding: Established local relationships help ensure a smooth and timely closing process.

Out-of-town lenders often use appraisal management companies that may assign appraisers unfamiliar with the local market, leading to inaccurate valuations and potential financing issues.

Advice for First-Time Home Buyers

When securing a mortgage, first-time buyers should focus on:

Working with a reputable loan officer – One who provides personalized guidance, not just rate quotes.
Understanding the full cost of the loan – Rate, points, and other expenses.
Strategizing beyond the immediate purchase – Future refinancing, property use, and financial planning.

Interest rates matter, but the overall loan structure and long-term strategy are far more important for financial success.

Contact Information

For further assistance, contact Max Leaman:

Email: max@leamanloans.com
Team Email: leamanteam@leamanloans.com
Phone: (512) 293-1239

Max and his team are always available to provide expert guidance in navigating the mortgage process.