How to Find a Home and Get a Mortgage on the Internet

Overview

Find and finance your dream home from the comfort of your own desk chair

Once the exclusive province of the real estate brokerage industry, homebuyers now have the freedom to shop for a house from their own computers. New developments such as "streaming videos" have made open houses a round-the-clock event. With the plethora of homes for sale on the Internet, plus the ability to now shop for a home mortgage on line, buying a house has never been simpler. This new found freedom ...

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Overview

Find and finance your dream home from the comfort of your own desk chair

Once the exclusive province of the real estate brokerage industry, homebuyers now have the freedom to shop for a house from their own computers. New developments such as "streaming videos" have made open houses a round-the-clock event. With the plethora of homes for sale on the Internet, plus the ability to now shop for a home mortgage on line, buying a house has never been simpler. This new found freedom has not only enhanced the homebuying process, but has also made it more efficient and more satisfying. Online Home, Online Mortage on the Internet provides prospective buyers with all the tools and techniques they'll need to find and finance their new home, without ever having to schedule another appointment with a broker or waste another weekend previewing properties. * By 2003, 10% of home mortgages may be originated on the Internet

Randy Johnson (North Port Beach, CA) is President of Independence Mortgage Company, which provides mortgage brokerage, real estate consulting, and financial services.

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Editorial Reviews

Booknews
Johnson, a veteran mortgage broker with an MBA from Stanford, explains the homebuying process then lists Internet resources for researching communities, figuring out what kind of mortgage is best, getting a loan, selecting a reliable agent, and planning payments so you can pay off your mortgage the month you retire. Annotation c. Book News, Inc., Portland, OR (booknews.com)
Robert J. Bruss

When the author explains how to shop for mortgages, whether on the Internet or at a local mortgage office, he really shines. Occasionally, the explanations get a bit technical, such as when he compares one mortgage against another. But Johnson is at his best when he explains, from his insider vantage point, how some mortgage lenders rip off borrowers. He also emphasizes how to find an honest mortgage broker.

Equally important, the book explains how to locate a home for sale, whether it's listed by a real estate agent or being sold by a do-it-yourself seller. Since Johnson's wife is a real estate agent, he adds her viewpoint on how a sharp buyer's agent can aid the buyer's quest.

Johnson never says buyers should get mortgages and buy homes solely on the Internet. Instead, he recommends the Internet as a starting point, to compare mortgage interest rates and to learn what homes are available in a community. He emphasizes the importance of having an ethical buyer's agent to show homes found on the Internet.

Especially revealing is Johnson's comparison of the Internet home-listing Web sites. He reviews 25 homes listed for sale in his local area. None of the major Web sites (Realtor.com, Homeadvisor.com, Homeseekers.com and Cyberhomes.com) included all the homes. Although Realtor.com had the most test listings, the others had many home listings not found on Realtor.com. For this reason, Johnson emphasizes shopping all the major home-listing Web sites.

Chapter topics include Decision Making and Salesmanship; Getting Information About Communities; Finding and Buying a Home; Selling a Home Online; Estimating What It's Worth; Finding and Working with a Real Estate Agent; Understanding and Controlling the Closing Process; Getting a Mortgage on the Internet; Choosing the Right Loan; Qualifying; Checking Credit; Understanding APR, Buy-Downs, and Discount Points; Ensuring Lenders Treat You Fairly; and Managing Your Mortgage.

Thus ultra-complete book about home buying and financing explains how to start your home quest using the Internet. Readers can spend days checking out the many recommended Web sites. On my scale of one to 10, this excellent well-organized, well-written book rates a solid 10.

--Robert J. Bruss, Tribune Media Services
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Product Details

  • ISBN-13: 9780471380726
  • Publisher: Wiley, John & Sons, Incorporated
  • Publication date: 10/20/2000
  • Edition number: 1
  • Pages: 320
  • Product dimensions: 6.07 (w) x 9.02 (h) x 0.84 (d)

Read an Excerpt

DECISION MAKING AND SALESMANSHIP

It reeks with the thick atmosphere of bargain and sale.
--HENRY ADAMS

The dominant influence that spawned the arts was the need to impose order on the confusion caused by intelli-gence.

--EDWARD O. WILSON, CONSILIENCE: THE UNITY OF KNOWLEDGE

KEY POINTS ° Many subtle factors influence our decision-making processes. ° The desire for immediate gratification often overrides reason. ° Crafty advertisers can plant erroneous concepts that mislead. ° You will usually find a salesman at every decision point. Sometimes they help, sometimes not.

° Those who take time to educate themselves make better deci-sions.

Talking about decision making and the effects that marketing and salesmanship can have on the faculties of reason may seem unusual in a book about real estate and the Internet, but the purpose of this book is not just to help you gather real estate information. My objective is, first, to give you good ways to find real estate information, and second, to help you use that information to make better decisions. The majority of people make less than optimal decisions about their mortgages, and I want to ensure that you are not one of them by giving you a thorough grounding in the intricacies of that side of the business as well.

7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 1 1 Page 2 3 During the 20 years that I have been in the real estateÐ mortgage business, I have watched thousands of people make decisions. When it comes to choosing a home, most people know what they want. After all, we have lived in one home or another all of our lives, and we have a good idea about what we like and don't like. Conversely, I have watched people make monumental mistakes in strategizing how to buy or sell their homes, how to utilize the services of their agents, and how to negotiate the terms of sale, even basing their negotiating strategy on inaccurate assumptions about the other party's motivation. A typical example is the propensity of people to believe, in a tough market, that they can get "top dollar" for their home yet expect another seller to cave in and give them a "great deal." It doesn't work that way, folks. And when it comes to mortgages, people also have preconceived notions about what they want and how they can get it. These preconceptions are usually wrong.

IMMEDIATE GRATIFICATION Most all of us suffer from a defect unique among American consumers: We prefer-- often demand-- the immediate gratification of saving money today versus the delayed gratification of getting a much larger benefit a few years down the road. Part of this is due to the fact that Americans love the idea of "sales" and "discounts." Another reason is that con-sumers are so used to seeing so many choices among products that are almost identical, they do not ask questions about quality and service. This carries over to the big-ticket items, including homes and mort-gages. As to mortgages, people don't know how the mortgage industry is structured, they don't know all the choices the mortgage industry offers, and they don't know how to evaluate choices. Some homebuyers are so locked into a particular strategy that they do not listen to or use good information at their disposal. Let's face it: While it is important to make the best decisions you can in all areas of your life, it is especially important in selecting a home and financing it. The sheer size of the transaction means that it has the greatest impact on most families' financial affairs. The bottom line is that whether you make a good decision or a bad decision can have awesome consequences. Though I talk here primarily about mortgages, this material can be applied to homebuying, as well as the purchase decisions you make in all areas of your economic life.

HOW PEOPLE MAKE DECISIONS Cultural anthropologists and developmental psychologists have stud-ied how early humans made decisions in the days when Lucy wan-

2 How to Find a Home and Get a Mortgage on the Internet 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 2 2 Page 3 4 dered out of Olduvai Gorge. Well, maybe not back that far, but, say, 5000 years ago. People make decisions based on their belief structures, an all-embracing view, or "how I think the world works." When you examine history, you can see that three main sets of belief structures have existed, leading to different methods of gathering and processing information that have evolved over the millennia. The earliest humans had no concept as to how the world worked other than that times were good for a while and then times were bad for a while. Even worse, the normal life span was not long enough for people to pass on to future generations some of the important facts they had learned. In those perilous times there was no explanation of the changes from good times-- adequate rain, abundant crops, plenti-ful game-- to bad times-- drought, absence of game, natural disasters, plague-- so people created a world of myths, totems, taboos, and a host of gods that had to be propitiated regularly in the expectation that the gods would be pleased and either allow the good times to continue or bring them back. Some cultures even sacrificed virgins to assure good fortune during the coming seasons. As bizarre as this may seem to us today, it made perfectly good sense to cultures that did not have a good grip on the factors affecting their environments. The Greeks and Romans, in their time, had sufficiently advanced to overcome some of the ill effects of the natural cycles. Aqueducts assured adequate water and a system of roads supported growing com-merce as well as assuring the ability to move the army around to main-tain order. Although the classical Greeks and Romans worshipped plural gods and hadn't totally abandoned the concept of sacrifices, they had moved on to goats and chickens, which must have permitted vir-gins to sleep more soundly. Even after the Renaissance, strange events showed that people's decision-making abilities still were rooted in some fairly bizarre beliefs. Galileo spent the last years of his life virtually under house arrest. He was saved from worse penalties only when he agreed not to promulgate his view that the Sun was the center of our solar system, a teaching that was contrary to the Pope's belief. We accept as common facts today things that were viewed with skepticism in ear-lier times. Those people weren't dumb! It's just that their belief struc-tures, however flawed, profoundly influenced their decision-making processes. In the modern era, reason and a reliance on scientific methods of analysis flourished contemporaneously with the Industrial Revolution and should have brought an end to the older belief structures. But sci-ence did not account for people's intransigence and resistance to change. When the Wright brothers flew at Kitty Hawk, some of the most highly regarded scientific minds of the day dismissed it as simply a fluke and stated that further advancement of this trickery had neither scientific interest nor the prospect of commercial success. That hap-pened within the last 100 years.

Decision Making and Salesmanship 3 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 3 3 Page 4 5 Today, when millions of people invest billions of dollars in higher education, and half the homes in America have computers in them, you'd think that decision making would be highly evolved. When you ask people how they make decisions, most will give you answers that suggest that they carefully gather information and use shrewd decision-making processes based on reason. In practice, however, most people's decision-making processes are heavily influenced by emotion and fac-tors that are buried deep within the limbic system of the brain. As often as not, the beliefs people hold about their economic decisions have been prompted by shrewd marketing types eager to induce consumers to make decisions favorable to a certain product or service. This applies to the mortgage industry, too. The power of marketing influence is nothing short of phenom-enal. Certain people, such as TV evangelists, politicians, and super-salespeople, seem to have an ability to mesmerize others-- to get them to send in money, vote, or buy-- that ordinary people cannot duplicate. You can call it charisma, if it has a positive purpose-- or smooth-talking, blue-suede-shoe salesmanship if not-- but you can recognize that it happens. Every week there's a story about some investment scam that bilks people out of their life savings. I'm sure you look at the vic-tims and say, "How could those people have been so stupid?" The truth is that, given the right circumstances and the right idea, all of us can be victimized in similar fashion. We may not give away our life savings to some con artist, but both you and I have bought things we have never used and that have ended up at a garage sale the next summer. They may have been items of small economic consequence, but it happened, and we wasted our money. The real estate sales and mortgage businesses are no different; they attract more than their fair share of salespeople who seem to have an inborn ability to find the weak spots in a consumer's mental defense network and prey on him or her. These people are an embarrassment to the honest professionals in the business, but they have been able to flourish because so many borrowers are willing to suspend their sense of disbelief long enough for the unethical real estate agent or loan rep to worm his or her way in. No doubt one of the characteristics of the con has to be a culti-vated sense of friendliness. "He was so nice, and he quoted us a great rate," people say, after they have been had. Of course! Do you expect the con to dress like a homeless person? Let me make the point another way. A sailor walks into a bar and a girl comes up and sits next to him and asks, "Hi, sailor. Would you buy me a drink?" Do you really think that she is only interested in being his friend? So it happens in the world of commerce too. That the worlds of friendship and commerce can be intertwined is not a bad thing, but you should not blithely assume that people who are friendly have your best interests at heart. Psychologists have long known that the human brain can "create"

4 How to Find a Home and Get a Mortgage on the Internet 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 4 4 Page 5 6 images that it expects to see. For example, researchers put a subject in a dark room, display a paper with a bunch of dots on it, and tell the sub-ject it is a picture of a bear. As the researchers increase the light, they instruct the subject, "Tell us when you see the bear," and sure enough, at some light level, the person says, "I see it!" Of course, when the lights are turned up all the way, everyone can see that it isn't a picture of a bear at all. What has happened is that the mind has filled in the spaces between the dots with its own expectations, creating for itself the picture of a bear. This same phenomenon results in a characteristic shared by many American consumers, a quality that seems to make them particularly susceptible to what I call the "little con." As I mentioned earlier, Amer-icans have a need to find a bargain; they want to find a bargain. Almost invariably, this desire expresses itself by their being overly price con-scious, meaning they tend to be price shoppers as opposed to being value or quality shoppers. It seems easy for these consumers to come to the conclusion that there are no quality differences between consumer goods offered by different manufacturers, so they think that buying the one with the lowest price is smart buying. This is less a manifestation of greed than it is a reflection of Americans' innate willingness to believe that "if we shop hard enough, we'll find a bargain." Over 100 years ago, John Ruskin said, "There is no product that some man can-not make a little worse and sell a little cheaper, and the buyers who consider only price are this man's lawful prey." It is this incessant need for a bargain that makes people jump for joy when they hear a "little con." They want to find a bargain, and when they hear something that sounds enticing, their mind "fills in the space between the dots" and they see the bear. Their minds become glazed over at their belief that they really have found a good deal. Their willingness to believe a little con means that there are always enough salesmen-- those whose claims are not constrained by truth-- to satisfy their needs. This is particularly true in the mortgage industry. It is a somewhat unique business in that people shop on the basis of one price today, but the actual rate they are going to pay won't be set for 30 or 60 days. That means that the lender can quote a rate that is a total fabrication, and then blame the changes on variations in the market. As a consumer, your willingness to trust will make you not want to believe this, but some lenders-- maybe even as many as half of them-- routinely lie to customers about rates. If you call enough lenders, you're sure to find one of them. The most disturbing aspect of this is that a customer may have just talked with the most reliable, trustworthy lender in town, someone who knocks himself or herself out for his or her customers and really would get the consumer the best deal. But the rate shopper keeps calling until he or she finds the liar. From the earliest times in our history it has been so; hence the image of the frontier snake oil

Decision Making and Salesmanship 5 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 5 5 Page 6 7 salesman is firmly and correctly a part of American folklore and his-tory. Unfortunately, it is no different today.

BEHAVIOR CHANGES WITH KNOWLEDGE The good news is that once consumers learn about a particular class of products, some of that need to find a bargain disappears. Every time you go to the store, you face an extraordinary number of choices. You have no doubt bought a cheap brand of a simple product-- say, maca-roni and cheese. It's so simple, you wonder how any manufacturer can screw it up. Unbelievably, they can, and so you go back to the higher-priced brand, the one you know is good. Maybe you've bought one of the $. 79 screwdrivers you see near the checkout stand. They seem to last about six weeks, so if you keep replacing them every six weeks, you're spending over $6 per year on screwdrivers. Finally you "get it," and buy a $3 screwdriver with a lifetime guarantee, and the cost per month drops substantially. Simply put, once people get educated, they do a more sensible job of decision making. So how much should you be willing to pay for an education when you're about to pay $100,000 or $200,000 or $500,000 for a home and the mortgage to finance it? The point is that this same gullibility goes on in the real estate business and the mortgage business, too. I have seen people get talked into buying a home that I didn't think was right for them and, sure enough, a year or two later, sell that home and buy the one they should have in the first place. Very expensive mistake! I've seen people mes-merized by all kinds of mortgage marketing hoopla, even by reputable companies. Let me give you some examples. Millions of homeowners were talked into taking adjustable-rate mortgages (ARMs) tied to the 11th District Cost of Funds Index (COFI). The sales pitch was that this index was stable, whereas the other com-mon index, the Treasury Bill index, was volatile. Believing that volatil-ity was bad and that stability was good, millions chose the stable loan. The hitch? In a market environment where rates are falling, a volatile loan drops faster, which is exactly what you want. When people heard stability, though, they turned off the reasoning part of their brains before they could ask, "How much is this stability going to cost me?" The answer was that the 11th District Cost of Funds loans had a rate that was over 1 percent higher all during the 1980s than available but less well promoted alternatives. If you had a $200,000 loan, common in California, you paid over $2,000 every year for the privilege of having your stable loan. Obviously, the COFI loan, a great choice at other times, was not a bargain at that time. It was a rip-off. Here's a more recent example. You probably heard about points, the up-front fee paid to a lender. One point is 1 percent of the loan amount--$ 2,000 on a $200,000 loan. This topic is covered in consider-

6 How to Find a Home and Get a Mortgage on the Internet 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 6 6 Page 7 8 able detail in Chapter 14, "Understanding APR, Buy-Downs, and Dis-count Points." Because no one wants to spend $2000 if they don't have to, a loan with no points sounds like a bargain, doesn't it? Well, the full story is that the lenders raise the rate on these loans to above market levels. Why? For every $1000 the lender subsidizes your loan up front, you'll pay $3000 in extra interest over the next 10 years-- a good deal for the lender, but bad for you. By the way, these days almost all lenders offer a zero-point option, but it's not a good one for most consumers, a point we'll also cover in Chapter 14. Here's the latest gimmick. "Get your loan from us, and if the rate falls 1 Ú2 percent, you can refinance at no cost." Sounds like another bar-gain, right? You bet it does, because a typical refinance transaction costs about $2000 plus points. You are being led-- actually, misled-- to believe that you are going to save over $2000 in the future, a com-pellingly attractive offer. I had a client who had heard about this loan and became fixated on it; it was all he talked about. At that time, a one-point loan would cost 7.375 percent, so the borrower was saying to himself, "If rates fall to 6.875 percent, I can refinance almost for free." When I investigated, I found it was very misleading, nothing more than a variation of the zero pointÐ zero cost loan. The hitch was that the lender's posted "re-fi rate" was 7.875 percent, about 1 Ú2 percent over the going rate. That means that rates would actually have to fall 1 percent from current levels-- not 1 Ú2 percent-- to trigger the deal. If rates actually fell 1 percent, my client could get a "free" re-fi, but at a rate 1 Ú2 percent higher than the market rate; and at that rate, there would be a $4,000 rebate to the originator on a $200,000 loan. Almost every lender in the western hemisphere would be willing to do the same deal any day of the week! So would I, so I told the client that I would refinance his home anytime he wanted, and we would use the posted rate at this lender's Web site. This so-called bargain received tremendous press. A nationally syn-dicated columnist wrote an article about it that appeared in newspapers all across the country. A national magazine featured it in a box with the headline: "NEVER PAY TO REFINANCE AGAIN." Is that an attention-getter? How many people will be snookered by it? Lots, you can be sure, because the promise of anything free has a powerful appeal.

THE INFLUENCE OF ADVERTISING ON DECISION MAKING Psychologists have long known that feelings of pleasure can be caused by the release of chemicals called endorphins. Spending money on things you want appears to cause the release of endorphins and thus is very pleasurable. Who would not attest to the enormous kick he or she gets from going on a shopping spree? How do you feel when you drive off of the dealer's lot with a new car? It smells good and feels better.

Decision Making and Salesmanship 7 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 7 7 Page 8 9 That fact is not lost on the marketers of consumer goods trying to get you to buy their products. If you are a first-time homebuyer, you're about to experience it again. When your transaction finally closes and you walk through the door of your new home, I guarantee that you'll feel the thrill as those endorphins charge around your brain! A major influence on the decision-making process of many-- perhaps most-- Americans is the barrage of advertising to which we are all subjected. In most cases, at the heart of the typical advertising mes-sage is an appeal not to reason but to basic emotions of the consumer, perhaps trying to trigger those endorphins to flow. A primary target is self-image. Take ads for automobiles, which frequently tap into the sub-conscious belief that a man who drives a large, powerful car or a small, fast car will be more desirable to women. Let's face it; maintenance costs, mileage, and trade-in value, facts that should be important, are of minor importance for many consumers as they shop for a car. You think it's different for mortgage advertising, right? Think again. Most of the beliefs people have about mortgages are nothing more than the flowering fruits of seeds that were planted by various mortgage industry forces via advertising and marketing. We'll explore a couple of them to illustrate. First, when most people hear the word mortgage, they think, "30- year fixed-rate mortgage." If you think of a mortgage as a product, that particular one is the most expensive product of any offered by the mort-gage industry. So why do most people, who want to save money, start their shopping process by asking about the loan with the highest rate? In fact, the mortgage industry offers many loan programs-- several hundred, at least-- meaning that consumers, young or old, rich or poor, can choose the particular loan type that best fits their individual needs. But because so many people start out by shopping for the 30-year fixed-rate mortgage, they never ask about other types of loans. Their ignorance is exacerbated by the fact that many of the "loan officers" they talk with are so poorly trained that these supposed professionals do not under-stand the relative merits of the different programs themselves. Thus the loan officers are unable to counsel their customers wisely. Finally, as one lender told me, "If the customer says 'yes' to a loan quote, even if it's not quite right for them, what incentive is there for me to confuse him by bringing up more alternatives?"

THE POWER OF FNMA AND FHLMC As to pricing, it is important to recognize that the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) dominate the mortgage market for the most popular loans. These two companies are stockholder-owned companies that operate under special charters from

8 How to Find a Home and Get a Mortgage on the Internet 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 8 8 Page 9 10 the government. Because they buy a majority of the loans in the coun-try, they are responsible for setting the rates on the types of loans that most homebuyers want-- 30-year and 15-year fixed rate mortgages. FNMA and FHLMC buy loans from banks, S& Ls, and mortgage bankers, then package them into "pools" of mortgages in a process known as securitization. They then sell interests in those pools to investors, such as pension plans, mortgage real estate investment trusts (REITs), and other purchasers of fixed-income securities. This is an oversimplifica-tion of a very complex topic, but essentially FNMA and FHLMC set the rates every day for the various loans they purchase. That establishes the market. You will get your loan from one of the 25,000 "lenders" that orig-inate loans, but a week later the lender will sell your loan to FNMA and FHLMC. If all lenders pay the same rate for their money, how much dif-ference can there be in the rates they charge you? Very little. The base price is established, and the only thing your lender can control is how much it marks up the rate to cover its costs. The total amount is on the order of 2 percent, so even if a lender were to work for free, you wouldn't save very much. Specifically, there are never, ever any "sales" in the mortgage business as there are in the retail industry, where stores mark down prices 25 percent or 40 percent or 50 percent to move out the last of their inventory. As a result, there is far less difference in pric-ing between one large, ethical lender and another than most people think. The following is the result of a little survey I did. I called the top 30 lenders in my market to get their pricing. Figure 1.1 shows the results. Twenty-four of the 30 were at 1, 1.125, or 1.25 points.

Decision Making and Salesmanship 9

Figure 1.1 Points charged by 30 lenders-- same rate.

7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 9 9 Page 10 11 10 How to Find a Home and Get a Mortgage on the Internet You can see that the differences are almost infinitesimal. Remem-ber, these are large, ethical lenders who just want to have your busi-ness. Sadly, there are other, mostly smaller lenders who have, shall we say, fewer ethical constraints on their approach to customers. If you end up doing business with them, they will try to get into your wallet and you will pay more. The good news is that many other smaller lenders operate more efficiently with lower overhead and can do busi-ness profitably with slightly better rates. (That's the lender that quoted 0.875 points.)

THE COMMODITY CONCEPT A commodity is a product that has identical characteristics, regardless of its source. Wheat, oil, coffee, and pork bellies are commodities. Com-panies are limited in the way they market commodities because prod-uct characteristics and prices are equal. One bushel of wheat is the same as any other bushel of wheat. It is also true that one 30-year fixed-rate mortgage is identical to every other 30-year fixed-rate mortgage. This raises the question: If there are so many similarities in rates between lenders, why do people think that there are large differences? The answer is that the industry and most major lenders want to perpet-uate the idea that there are significant differences so that consumers will spend time shopping for a loan, believing they can get a better deal. Why? Simply because lenders want their salespeople to have a shot at you. Major lenders are not going to come out and say, "The loans we offer are identical to those offered by almost all of our competitors and, what's more, our rates and costs are the same as their rates and costs, too." Even though that is true, it would dramatically change the way they operate. Frankly, the industry likes it the way it is; lenders have learned to succeed in this environment, and no one wants to change it.

HOW LENDERS OPERATE Because a company cannot say, "Our product is better," the correct, eth-ical way to compete in a commodity market is to establish a reputation of being trustworthy, or of being convenient, or of offering fast response, or some aspect of service that consumers find attractive. It applies to many industries where there are many, many producers of almost identical products. Unfortunately, though, it is far easier for a lender to promote itself by saying that its rates are better. On the Inter-net, for example, you'll find more than 20,000 mortgage Web sites, and, amazingly, all of them offer the lowest rates. How can they all be the lowest? They can't! In fact, by definition, half of them are worse than

7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 10 10 10 Page 11 12 average. But lenders know that borrowers are looking for a bargain, so they promise one! Perhaps you are wondering: What about the lenders that post their rates so you can comparison shop? Certainly some lenders are totally truthful in posting rates, but others almost never are. They just claim to have the lowest rates to entice the customer in the door. Then they do a bait and switch a week or a month later, when they are well into the process. For example, some companies with very high Internet visibil-ity post very attractive rates to attract borrowers to apply. Everyone finds out later that only 2 percent of the applicants are "qualified" for loans at that rate. The other 98 percent are told they don't qualify and are offered higher rates. In fact, the lender never intended to fund more than that 2 percent, because the lender loses money on those deals and makes it up on the other 98 percent. This goes on all the time, offline and online. The point here-- and it is an important point-- is that you can't tell the difference between truth-tellers and liars, so don't rate shop!

THE BETTER SIDES OF SALESMANSHIP The press regularly castigates any group of people who earn commis-sion income. The way the media tell it, no one who earns a commission can be trusted. In contrast, the person who helps you at the bank is salaried. Can you trust him or her? Maybe, maybe not. The sign on the desk may say Loan Consultant, but this person is really a salesperson for that company's product. You'll never hear a bank employee say, "You know, I just don't think we offer a program that suits you." He or she will always tell you that the bank's program is perfect for you and urge you to buy. By comparison, the commission loan rep working for a mortgage broker doesn't care which lender or which program you choose; he or she gets a commission either way. That allows the ethical loan rep to stand back and give you impartial advice, to help you make intelligent decisions. Yet, because such a loan rep is paid a commission that is a percentage of the loan amount, the press has made it sound as if he or she can never put you ahead of the drive to earn a bigger com-mission. That's just not true. The best people in the business are happy that you came to them, and they won't steer you to programs just because they can earn more money. The reputable, competent profes-sionals in the business make three or four times as much as their salaried counterparts, and they typically do three or four times the loan volume, too. In fact, the most successful reps, those who often make over $100,000 per year, would never, ever go to work for one of those large institutions that paid them a salary of probably less than half what they can make in commissions. Salespeople make money by facilitating transactions. Most are

Decision Making and Salesmanship 11 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 11 11 11 Page 12 13 honest and serve their customers faithfully. They also serve a variety of other, more useful purposes. First, they are the source of information about products and services you are interested in buying; they can fill in the gaps in your knowledge. Another often overlooked function is to get you off of dead center, to get you to do something. Often consumers need prodding, and, as I will discuss further in Chapter 7, "Finding and Working with a Real Estate Agent," salespeople can be of invaluable help in spurring both buyers and sellers into action, inspiring them with a sense of urgency when it is needed. When you deal with successful professionals-- as you should-- you are going to be dealing with people who earn commissions, so get it out of your mind that there is something wrong with someone mak-ing money on your transaction. Concentrate on how much value you are receiving, how much these people's advice can save you. Usually that is many times what they are making.

SUMMARY My purpose in exploring salesmanship and the decision-making process is to expose the subtle forces that have historically been very effective in planting ideas in the minds of so many people. By buying this book, you have taken the first step in expanding your knowledge and overriding some of those incorrect notions. In my mortgage practice, I deal with many people who are in the top 5 percent of the populace in terms of income, assets, and education. Despite their advantages, they too have misconceptions when they arrive. And most of them end up with a different loan or select a differ-ent rate versus fee structure than what they had in mind when they walked into my office. The difference in what they were set to spend and what they end up spending after talking to me is many thousands of dollars per customer, which explains the title of my first book, How to Save Thousands of Dollars on Your Home Mortgage. I am equally sure that I can help many more people save money, too, via this new e-channel. Before we get started saving you money, however, let me summa-rize what makes for a wise decision-making process:

° It is reasonable to get rid of your preconceived notions. ° It is reasonable to do research to determine which among the array of mortgages offered best fits the goals you have set.

° It is reasonable to carefully analyze the various rate versus fee alternatives your lender offers and select the one that makes the most sense for you.

° It is reasonable to work at finding the most opportune time to lock in your rate.

12 How to Find a Home and Get a Mortgage on the Internet 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 12 12 12 Page 13 The way to save money is in the decisions you make about loan type, rate versus fee, and when to lock in, not in rate shopping. Yet a recent survey reported that 73 percent of Internet mortgage shoppers said that the reason they were searching for a loan on the Internet was to save money, as opposed to searching for better service, however that might be defined. Naturally, if lenders perceive that people are looking for a bargain, they will try to convince you that you can get a bargain from them. As a consequence, many lenders on the Internet are going to appeal to-- even pander to-- the consumer's expressed desire, a low rate. In my 20 years in the mortgage business, I have never seen such open and blatant appeals to the rate-conscious shopper. Be very cau-tious about this. Is it possible to get a good deal on the Internet? Absolutely-- but educate yourself first! Recognize that the majority of the most easily identified Internet lenders are not going to be well equipped to give you much assistance. Remember, they perceive that they are in a price-driven market, not a service-driven market. In their drive to cut costs, they have eliminated most of the people who tradi-tionally provided service. Being empowered means acknowledging up front that you're going to have to make these decisions yourself. Take good notes.

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Page 1 2 DECISION MAKING AND SALESMANSHIP It reeks with the thick atmosphere of bargain and sale. --HENRY ADAMS

The dominant influence that spawned the arts was the need to impose order on the confusion caused by intelli-gence.

--EDWARD O. WILSON, CONSILIENCE: THE UNITY OF KNOWLEDGE

KEY POINTS ° Many subtle factors influence our decision-making processes. ° The desire for immediate gratification often overrides reason. ° Crafty advertisers can plant erroneous concepts that mislead. ° You will usually find a salesman at every decision point. Sometimes they help, sometimes not.

° Those who take time to educate themselves make better deci-sions.

Talking about decision making and the effects that marketing and salesmanship can have on the faculties of reason may seem unusual in a book about real estate and the Internet, but the purpose of this book is not just to help you gather real estate information. My objective is, first, to give you good ways to find real estate information, and second, to help you use that information to make better decisions. The majority of people make less than optimal decisions about their mortgages, and I want to ensure that you are not one of them by giving you a thorough grounding in the intricacies of that side of the business as well.

7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 1 1 Page 2 3 During the 20 years that I have been in the real estateÐ mortgage business, I have watched thousands of people make decisions. When it comes to choosing a home, most people know what they want. After all, we have lived in one home or another all of our lives, and we have a good idea about what we like and don't like. Conversely, I have watched people make monumental mistakes in strategizing how to buy or sell their homes, how to utilize the services of their agents, and how to negotiate the terms of sale, even basing their negotiating strategy on inaccurate assumptions about the other party's motivation. A typical example is the propensity of people to believe, in a tough market, that they can get "top dollar" for their home yet expect another seller to cave in and give them a "great deal." It doesn't work that way, folks. And when it comes to mortgages, people also have preconceived notions about what they want and how they can get it. These preconceptions are usually wrong.

IMMEDIATE GRATIFICATION Most all of us suffer from a defect unique among American consumers: We prefer-- often demand-- the immediate gratification of saving money today versus the delayed gratification of getting a much larger benefit a few years down the road. Part of this is due to the fact that Americans love the idea of "sales" and "discounts." Another reason is that con-sumers are so used to seeing so many choices among products that are almost identical, they do not ask questions about quality and service. This carries over to the big-ticket items, including homes and mort-gages. As to mortgages, people don't know how the mortgage industry is structured, they don't know all the choices the mortgage industry offers, and they don't know how to evaluate choices. Some homebuyers are so locked into a particular strategy that they do not listen to or use good information at their disposal. Let's face it: While it is important to make the best decisions you can in all areas of your life, it is especially important in selecting a home and financing it. The sheer size of the transaction means that it has the greatest impact on most families' financial affairs. The bottom line is that whether you make a good decision or a bad decision can have awesome consequences. Though I talk here primarily about mortgages, this material can be applied to homebuying, as well as the purchase decisions you make in all areas of your economic life.

HOW PEOPLE MAKE DECISIONS Cultural anthropologists and developmental psychologists have stud-ied how early humans made decisions in the days when Lucy wan-

2 How to Find a Home and Get a Mortgage on the Internet 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 2 2 Page 3 4 dered out of Olduvai Gorge. Well, maybe not back that far, but, say, 5000 years ago. People make decisions based on their belief structures, an all-embracing view, or "how I think the world works." When you examine history, you can see that three main sets of belief structures have existed, leading to different methods of gathering and processing information that have evolved over the millennia. The earliest humans had no concept as to how the world worked other than that times were good for a while and then times were bad for a while. Even worse, the normal life span was not long enough for people to pass on to future generations some of the important facts they had learned. In those perilous times there was no explanation of the changes from good times-- adequate rain, abundant crops, plenti-ful game-- to bad times-- drought, absence of game, natural disasters, plague-- so people created a world of myths, totems, taboos, and a host of gods that had to be propitiated regularly in the expectation that the gods would be pleased and either allow the good times to continue or bring them back. Some cultures even sacrificed virgins to assure good fortune during the coming seasons. As bizarre as this may seem to us today, it made perfectly good sense to cultures that did not have a good grip on the factors affecting their environments. The Greeks and Romans, in their time, had sufficiently advanced to overcome some of the ill effects of the natural cycles. Aqueducts assured adequate water and a system of roads supported growing com-merce as well as assuring the ability to move the army around to main-tain order. Although the classical Greeks and Romans worshipped plural gods and hadn't totally abandoned the concept of sacrifices, they had moved on to goats and chickens, which must have permitted vir-gins to sleep more soundly. Even after the Renaissance, strange events showed that people's decision-making abilities still were rooted in some fairly bizarre beliefs. Galileo spent the last years of his life virtually under house arrest. He was saved from worse penalties only when he agreed not to promulgate his view that the Sun was the center of our solar system, a teaching that was contrary to the Pope's belief. We accept as common facts today things that were viewed with skepticism in ear-lier times. Those people weren't dumb! It's just that their belief struc-tures, however flawed, profoundly influenced their decision-making processes. In the modern era, reason and a reliance on scientific methods of analysis flourished contemporaneously with the Industrial Revolution and should have brought an end to the older belief structures. But sci-ence did not account for people's intransigence and resistance to change. When the Wright brothers flew at Kitty Hawk, some of the most highly regarded scientific minds of the day dismissed it as simply a fluke and stated that further advancement of this trickery had neither scientific interest nor the prospect of commercial success. That hap-pened within the last 100 years.

Decision Making and Salesmanship 3 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 3 3 Page 4 5 Today, when millions of people invest billions of dollars in higher education, and half the homes in America have computers in them, you'd think that decision making would be highly evolved. When you ask people how they make decisions, most will give you answers that suggest that they carefully gather information and use shrewd decision-making processes based on reason. In practice, however, most people's decision-making processes are heavily influenced by emotion and fac-tors that are buried deep within the limbic system of the brain. As often as not, the beliefs people hold about their economic decisions have been prompted by shrewd marketing types eager to induce consumers to make decisions favorable to a certain product or service. This applies to the mortgage industry, too. The power of marketing influence is nothing short of phenom-enal. Certain people, such as TV evangelists, politicians, and super-salespeople, seem to have an ability to mesmerize others-- to get them to send in money, vote, or buy-- that ordinary people cannot duplicate. You can call it charisma, if it has a positive purpose-- or smooth-talking, blue-suede-shoe salesmanship if not-- but you can recognize that it happens. Every week there's a story about some investment scam that bilks people out of their life savings. I'm sure you look at the vic-tims and say, "How could those people have been so stupid?" The truth is that, given the right circumstances and the right idea, all of us can be victimized in similar fashion. We may not give away our life savings to some con artist, but both you and I have bought things we have never used and that have ended up at a garage sale the next summer. They may have been items of small economic consequence, but it happened, and we wasted our money. The real estate sales and mortgage businesses are no different; they attract more than their fair share of salespeople who seem to have an inborn ability to find the weak spots in a consumer's mental defense network and prey on him or her. These people are an embarrassment to the honest professionals in the business, but they have been able to flourish because so many borrowers are willing to suspend their sense of disbelief long enough for the unethical real estate agent or loan rep to worm his or her way in. No doubt one of the characteristics of the con has to be a culti-vated sense of friendliness. "He was so nice, and he quoted us a great rate," people say, after they have been had. Of course! Do you expect the con to dress like a homeless person? Let me make the point another way. A sailor walks into a bar and a girl comes up and sits next to him and asks, "Hi, sailor. Would you buy me a drink?" Do you really think that she is only interested in being his friend? So it happens in the world of commerce too. That the worlds of friendship and commerce can be intertwined is not a bad thing, but you should not blithely assume that people who are friendly have your best interests at heart. Psychologists have long known that the human brain can "create"

4 How to Find a Home and Get a Mortgage on the Internet 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 4 4 Page 5 6 images that it expects to see. For example, researchers put a subject in a dark room, display a paper with a bunch of dots on it, and tell the sub-ject it is a picture of a bear. As the researchers increase the light, they instruct the subject, "Tell us when you see the bear," and sure enough, at some light level, the person says, "I see it!" Of course, when the lights are turned up all the way, everyone can see that it isn't a picture of a bear at all. What has happened is that the mind has filled in the spaces between the dots with its own expectations, creating for itself the picture of a bear. This same phenomenon results in a characteristic shared by many American consumers, a quality that seems to make them particularly susceptible to what I call the "little con." As I mentioned earlier, Amer-icans have a need to find a bargain; they want to find a bargain. Almost invariably, this desire expresses itself by their being overly price con-scious, meaning they tend to be price shoppers as opposed to being value or quality shoppers. It seems easy for these consumers to come to the conclusion that there are no quality differences between consumer goods offered by different manufacturers, so they think that buying the one with the lowest price is smart buying. This is less a manifestation of greed than it is a reflection of Americans' innate willingness to believe that "if we shop hard enough, we'll find a bargain." Over 100 years ago, John Ruskin said, "There is no product that some man can-not make a little worse and sell a little cheaper, and the buyers who consider only price are this man's lawful prey." It is this incessant need for a bargain that makes people jump for joy when they hear a "little con." They want to find a bargain, and when they hear something that sounds enticing, their mind "fills in the space between the dots" and they see the bear. Their minds become glazed over at their belief that they really have found a good deal. Their willingness to believe a little con means that there are always enough salesmen-- those whose claims are not constrained by truth-- to satisfy their needs. This is particularly true in the mortgage industry. It is a somewhat unique business in that people shop on the basis of one price today, but the actual rate they are going to pay won't be set for 30 or 60 days. That means that the lender can quote a rate that is a total fabrication, and then blame the changes on variations in the market. As a consumer, your willingness to trust will make you not want to believe this, but some lenders-- maybe even as many as half of them-- routinely lie to customers about rates. If you call enough lenders, you're sure to find one of them. The most disturbing aspect of this is that a customer may have just talked with the most reliable, trustworthy lender in town, someone who knocks himself or herself out for his or her customers and really would get the consumer the best deal. But the rate shopper keeps calling until he or she finds the liar. From the earliest times in our history it has been so; hence the image of the frontier snake oil

Decision Making and Salesmanship 5 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 5 5 Page 6 7 salesman is firmly and correctly a part of American folklore and his-tory. Unfortunately, it is no different today.

BEHAVIOR CHANGES WITH KNOWLEDGE The good news is that once consumers learn about a particular class of products, some of that need to find a bargain disappears. Every time you go to the store, you face an extraordinary number of choices. You have no doubt bought a cheap brand of a simple product-- say, maca-roni and cheese. It's so simple, you wonder how any manufacturer can screw it up. Unbelievably, they can, and so you go back to the higher-priced brand, the one you know is good. Maybe you've bought one of the $. 79 screwdrivers you see near the checkout stand. They seem to last about six weeks, so if you keep replacing them every six weeks, you're spending over $6 per year on screwdrivers. Finally you "get it," and buy a $3 screwdriver with a lifetime guarantee, and the cost per month drops substantially. Simply put, once people get educated, they do a more sensible job of decision making. So how much should you be willing to pay for an education when you're about to pay $100,000 or $200,000 or $500,000 for a home and the mortgage to finance it? The point is that this same gullibility goes on in the real estate business and the mortgage business, too. I have seen people get talked into buying a home that I didn't think was right for them and, sure enough, a year or two later, sell that home and buy the one they should have in the first place. Very expensive mistake! I've seen people mes-merized by all kinds of mortgage marketing hoopla, even by reputable companies. Let me give you some examples. Millions of homeowners were talked into taking adjustable-rate mortgages (ARMs) tied to the 11th District Cost of Funds Index (COFI). The sales pitch was that this index was stable, whereas the other com-mon index, the Treasury Bill index, was volatile. Believing that volatil-ity was bad and that stability was good, millions chose the stable loan. The hitch? In a market environment where rates are falling, a volatile loan drops faster, which is exactly what you want. When people heard stability, though, they turned off the reasoning part of their brains before they could ask, "How much is this stability going to cost me?" The answer was that the 11th District Cost of Funds loans had a rate that was over 1 percent higher all during the 1980s than available but less well promoted alternatives. If you had a $200,000 loan, common in California, you paid over $2,000 every year for the privilege of having your stable loan. Obviously, the COFI loan, a great choice at other times, was not a bargain at that time. It was a rip-off. Here's a more recent example. You probably heard about points, the up-front fee paid to a lender. One point is 1 percent of the loan amount--$ 2,000 on a $200,000 loan. This topic is covered in consider-

6 How to Find a Home and Get a Mortgage on the Internet 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 6 6 Page 7 8 able detail in Chapter 14, "Understanding APR, Buy-Downs, and Dis-count Points." Because no one wants to spend $2000 if they don't have to, a loan with no points sounds like a bargain, doesn't it? Well, the full story is that the lenders raise the rate on these loans to above market levels. Why? For every $1000 the lender subsidizes your loan up front, you'll pay $3000 in extra interest over the next 10 years-- a good deal for the lender, but bad for you. By the way, these days almost all lenders offer a zero-point option, but it's not a good one for most consumers, a point we'll also cover in Chapter 14. Here's the latest gimmick. "Get your loan from us, and if the rate falls 1 Ú2 percent, you can refinance at no cost." Sounds like another bar-gain, right? You bet it does, because a typical refinance transaction costs about $2000 plus points. You are being led-- actually, misled-- to believe that you are going to save over $2000 in the future, a com-pellingly attractive offer. I had a client who had heard about this loan and became fixated on it; it was all he talked about. At that time, a one-point loan would cost 7.375 percent, so the borrower was saying to himself, "If rates fall to 6.875 percent, I can refinance almost for free." When I investigated, I found it was very misleading, nothing more than a variation of the zero pointÐ zero cost loan. The hitch was that the lender's posted "re-fi rate" was 7.875 percent, about 1 Ú2 percent over the going rate. That means that rates would actually have to fall 1 percent from current levels-- not 1 Ú2 percent-- to trigger the deal. If rates actually fell 1 percent, my client could get a "free" re-fi, but at a rate 1 Ú2 percent higher than the market rate; and at that rate, there would be a $4,000 rebate to the originator on a $200,000 loan. Almost every lender in the western hemisphere would be willing to do the same deal any day of the week! So would I, so I told the client that I would refinance his home anytime he wanted, and we would use the posted rate at this lender's Web site. This so-called bargain received tremendous press. A nationally syn-dicated columnist wrote an article about it that appeared in newspapers all across the country. A national magazine featured it in a box with the headline: "NEVER PAY TO REFINANCE AGAIN." Is that an attention-getter? How many people will be snookered by it? Lots, you can be sure, because the promise of anything free has a powerful appeal.

THE INFLUENCE OF ADVERTISING ON DECISION MAKING Psychologists have long known that feelings of pleasure can be caused by the release of chemicals called endorphins. Spending money on things you want appears to cause the release of endorphins and thus is very pleasurable. Who would not attest to the enormous kick he or she gets from going on a shopping spree? How do you feel when you drive off of the dealer's lot with a new car? It smells good and feels better.

Decision Making and Salesmanship 7 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 7 7 Page 8 9 That fact is not lost on the marketers of consumer goods trying to get you to buy their products. If you are a first-time homebuyer, you're about to experience it again. When your transaction finally closes and you walk through the door of your new home, I guarantee that you'll feel the thrill as those endorphins charge around your brain! A major influence on the decision-making process of many-- perhaps most-- Americans is the barrage of advertising to which we are all subjected. In most cases, at the heart of the typical advertising mes-sage is an appeal not to reason but to basic emotions of the consumer, perhaps trying to trigger those endorphins to flow. A primary target is self-image. Take ads for automobiles, which frequently tap into the sub-conscious belief that a man who drives a large, powerful car or a small, fast car will be more desirable to women. Let's face it; maintenance costs, mileage, and trade-in value, facts that should be important, are of minor importance for many consumers as they shop for a car. You think it's different for mortgage advertising, right? Think again. Most of the beliefs people have about mortgages are nothing more than the flowering fruits of seeds that were planted by various mortgage industry forces via advertising and marketing. We'll explore a couple of them to illustrate. First, when most people hear the word mortgage, they think, "30- year fixed-rate mortgage." If you think of a mortgage as a product, that particular one is the most expensive product of any offered by the mort-gage industry. So why do most people, who want to save money, start their shopping process by asking about the loan with the highest rate? In fact, the mortgage industry offers many loan programs-- several hundred, at least-- meaning that consumers, young or old, rich or poor, can choose the particular loan type that best fits their individual needs. But because so many people start out by shopping for the 30-year fixed-rate mortgage, they never ask about other types of loans. Their ignorance is exacerbated by the fact that many of the "loan officers" they talk with are so poorly trained that these supposed professionals do not under-stand the relative merits of the different programs themselves. Thus the loan officers are unable to counsel their customers wisely. Finally, as one lender told me, "If the customer says 'yes' to a loan quote, even if it's not quite right for them, what incentive is there for me to confuse him by bringing up more alternatives?"

THE POWER OF FNMA AND FHLMC As to pricing, it is important to recognize that the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) dominate the mortgage market for the most popular loans. These two companies are stockholder-owned companies that operate under special charters from

8 How to Find a Home and Get a Mortgage on the Internet 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 8 8 Page 9 10 the government. Because they buy a majority of the loans in the coun-try, they are responsible for setting the rates on the types of loans that most homebuyers want-- 30-year and 15-year fixed rate mortgages. FNMA and FHLMC buy loans from banks, S& Ls, and mortgage bankers, then package them into "pools" of mortgages in a process known as securitization. They then sell interests in those pools to investors, such as pension plans, mortgage real estate investment trusts (REITs), and other purchasers of fixed-income securities. This is an oversimplifica-tion of a very complex topic, but essentially FNMA and FHLMC set the rates every day for the various loans they purchase. That establishes the market. You will get your loan from one of the 25,000 "lenders" that orig-inate loans, but a week later the lender will sell your loan to FNMA and FHLMC. If all lenders pay the same rate for their money, how much dif-ference can there be in the rates they charge you? Very little. The base price is established, and the only thing your lender can control is how much it marks up the rate to cover its costs. The total amount is on the order of 2 percent, so even if a lender were to work for free, you wouldn't save very much. Specifically, there are never, ever any "sales" in the mortgage business as there are in the retail industry, where stores mark down prices 25 percent or 40 percent or 50 percent to move out the last of their inventory. As a result, there is far less difference in pric-ing between one large, ethical lender and another than most people think. The following is the result of a little survey I did. I called the top 30 lenders in my market to get their pricing. Figure 1.1 shows the results. Twenty-four of the 30 were at 1, 1.125, or 1.25 points.

Decision Making and Salesmanship 9

Figure 1.1 Points charged by 30 lenders-- same rate.

7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 9 9 Page 10 11 10 How to Find a Home and Get a Mortgage on the Internet You can see that the differences are almost infinitesimal. Remem-ber, these are large, ethical lenders who just want to have your busi-ness. Sadly, there are other, mostly smaller lenders who have, shall we say, fewer ethical constraints on their approach to customers. If you end up doing business with them, they will try to get into your wallet and you will pay more. The good news is that many other smaller lenders operate more efficiently with lower overhead and can do busi-ness profitably with slightly better rates. (That's the lender that quoted 0.875 points.)

THE COMMODITY CONCEPT A commodity is a product that has identical characteristics, regardless of its source. Wheat, oil, coffee, and pork bellies are commodities. Com-panies are limited in the way they market commodities because prod-uct characteristics and price s are equal. One bushel of wheat is the same as any other bushel of wheat. It is also true that one 30-year fixed-rate mortgage is identical to every other 30-year fixed-rate mortgage. This raises the question: If there are so many similarities in rates between lenders, why do people think that there are large differences? The answer is that the industry and most major lenders want to perpet-uate the idea that there are significant differences so that consumers will spend time shopping for a loan, believing they can get a better deal. Why? Simply because lenders want their salespeople to have a shot at you. Major lenders are not going to come out and say, "The loans we offer are identical to those offered by almost all of our competitors and, what's more, our rates and costs are the same as their rates and costs, too." Even though that is true, it would dramatically change the way they operate. Frankly, the industry likes it the way it is; lenders have learned to succeed in this environment, and no one wants to change it.

HOW LENDERS OPERATE Because a company cannot say, "Our product is better," the correct, eth-ical way to compete in a commodity market is to establish a reputation of being trustworthy, or of being convenient, or of offering fast response, or some aspect of service that consumers find attractive. It applies to many industries where there are many, many producers of almost identical products. Unfortunately, though, it is far easier for a lender to promote itself by saying that its rates are better. On the Inter-net, for example, you'll find more than 20,000 mortgage Web sites, and, amazingly, all of them offer the lowest rates. How can they all be the lowest? They can't! In fact, by definition, half of them are worse than

7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 10 10 10 Page 11 12 average. But lenders know that borrowers are looking for a bargain, so they promise one! Perhaps you are wondering: What about the lenders that post their rates so you can comparison shop? Certainly some lenders are totally truthful in posting rates, but others almost never are. They just claim to have the lowest rates to entice the customer in the door. Then they do a bait and switch a week or a month later, when they are well into the process. For example, some companies with very high Internet visibil-ity post very attractive rates to attract borrowers to apply. Everyone finds out later that only 2 percent of the applicants are "qualified" for loans at that rate. The other 98 percent are told they don't qualify and are offered higher rates. In fact, the lender never intended to fund more than that 2 percent, because the lender loses money on those deals and makes it up on the other 98 percent. This goes on all the time, offline and online. The point here-- and it is an important point-- is that you can't tell the difference between truth-tellers and liars, so don't rate shop!

THE BETTER SIDES OF SALESMANSHIP The press regularly castigates any group of people who earn commis-sion income. The way the media tell it, no one who earns a commission can be trusted. In contrast, the person who helps you at the bank is salaried. Can you trust him or her? Maybe, maybe not. The sign on the desk may say Loan Consultant, but this person is really a salesperson for that company's product. You'll never hear a bank employee say, "You know, I just don't think we offer a program that suits you." He or she will always tell you that the bank's program is perfect for you and urge you to buy. By comparison, the commission loan rep working for a mortgage broker doesn't care which lender or which program you choose; he or she gets a commission either way. That allows the ethical loan rep to stand back and give you impartial advice, to help you make intelligent decisions. Yet, because such a loan rep is paid a commission that is a percentage of the loan amount, the press has made it sound as if he or she can never put you ahead of the drive to earn a bigger com-mission. That's just not true. The best people in the business are happy that you came to them, and they won't steer you to programs just because they can earn more money. The reputable, competent profes-sionals in the business make three or four times as much as their salaried counterparts, and they typically do three or four times the loan volume, too. In fact, the most successful reps, those who often make over $100,000 per year, would never, ever go to work for one of those large institutions that paid them a salary of probably less than half what they can make in commissions. Salespeople make money by facilitating transactions. Most are

Decision Making and Salesmanship 11 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 11 11 11 Page 12 13 honest and serve their customers faithfully. They also serve a variety of other, more useful purposes. First, they are the source of information about products and services you are interested in buying; they can fill in the gaps in your knowledge. Another often overlooked function is to get you off of dead center, to get you to do something. Often consumers need prodding, and, as I will discuss further in Chapter 7, "Finding and Working with a Real Estate Agent," salespeople can be of invaluable help in spurring both buyers and sellers into action, inspiring them with a sense of urgency when it is needed. When you deal with successful professionals-- as you should-- you are going to be dealing with people who earn commissions, so get it out of your mind that there is something wrong with someone mak-ing money on your transaction. Concentrate on how much value you are receiving, how much these people's advice can save you. Usually that is many times what they are making.

SUMMARY My purpose in exploring salesmanship and the decision-making process is to expose the subtle forces that have historically been very effective in planting ideas in the minds of so many people. By buying this book, you have taken the first step in expanding your knowledge and overriding some of those incorrect notions. In my mortgage practice, I deal with many people who are in the top 5 percent of the populace in terms of income, assets, and education. Despite their advantages, they too have misconceptions when they arrive. And most of them end up with a different loan or select a differ-ent rate versus fee structure than what they had in mind when they walked into my office. The difference in what they were set to spend and what they end up spending after talking to me is many thousands of dollars per customer, which explains the title of my first book, How to Save Thousands of Dollars on Your Home Mortgage. I am equally sure that I can help many more people save money, too, via this new e-channel. Before we get started saving you money, however, let me summa-rize what makes for a wise decision-making process:

° It is reasonable to get rid of your preconceived notions. ° It is reasonable to do research to determine which among the array of mortgages offered best fits the goals you have set.

° It is reasonable to carefully analyze the various rate versus fee alternatives your lender offers and select the one that makes the most sense for you.

° It is reasonable to work at finding the most opportune time to lock in your rate.

12 How to Find a Home and Get a Mortgage on the Internet 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 12 12 12 Page 13 The way to save money is in the decisions you make about loan type, rate versus fee, and when to lock in, not in rate shopping. Yet a recent survey reported that 73 percent of Internet mortgage shoppers said that the reason they were searching for a loan on the Internet was to save money, as opposed to searching for better service, however that might be defined. Naturally, if lenders perceive that people are looking for a bargain, they will try to convince you that you can get a bargain from them. As a consequence, many lenders on the Internet are going to appeal to-- even pander to-- the consumer's expressed desire, a low rate. In my 20 years in the mortgage business, I have never seen such open and blatant appeals to the rate-conscious shopper. Be very cau-tious about this. Is it possible to get a good deal on the Internet? Absolutely-- but educate yourself first! Recognize that the majority of the most easily identified Internet lenders are not going to be well equipped to give you much assistance. Remember, they perceive that they are in a price-driven market, not a service-driven market. In their drive to cut costs, they have eliminated most of the people who tradi-tionally provided service. Being empowered means acknowledging up front that you're going to have to make these decisions yourself. Take good notes.

Decision Making and Salesmanship 13 7100_ Johnson_ 01_ mj. qxd 8/ 28/ 00 11: 21 PM Page 13 13

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Table of Contents

Decision Making and Salesmanship.
Gunfight at the Internet Corral.
Getting Information about Communities.
Finding and Buying a Home.
Selling a Home Online.
Estimating What It's Worth.
Finding and Working with a Real Estate Agent.
Understanding and Controlling the Closing Process.
Getting a Mortgage on the Internet: Part One.
Getting a Mortgage on the Internet: Part Two.
Choosing the Right Loan.
Qualifying.
Checking Credit.
Understanding APR, Buy-Downs, and Discount Points.
Ensuring Lenders Treat You Fairly.
Calculating Closing Costs, Lender Fees, and Other Fees.
Understanding 15-Year Loans and Accelerated Payoffs.
Managing Your Mortgage.
Some Thoughts on Financial Planning and Balancing Your Life.
Appendices.
Index.
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