GREGG STEBBEN calls mortgage shopping ""one of the most horrendous processes in the world.'' He has good reason. Two years ago, the Carmel Valley, Calif.-based writer almost lost his dream home when his mortgage broker mistakenly told him his loan had been approved. Then the broker took off to get married in the Caribbean. The deal fell through. Luckily, Stebben got another loan; but he learned from the experience. When it came time to refinance this summer, he turned to the Internet--and found he could get a better rate while paying less in transaction fees. More important, he says, it placed the onus of finding the best deal on someone he could absolutely depend on: himself.
Most homeowners have agonizing mortgage stories. But increasing numbers of savvy loan buyers are seeking a better experience on the Internet--many of them driven by the two recent cuts in interest rates by the Federal Reserve. The online loan sites, which include the start-ups E-Loan and HomeShark, Intuit's QuickenMortgage and Microsoft's HomeAdvisor, report they will issue $1 billion in loans this year, about 1 percent of the national total.
The sites let you compare rates and, in varying ways, pursue and close the loan. ""It's a totally different philosophy. We're not selling a particular loan but finding the best one for a customer,'' says E-Loan CEO Chris Larsen. Trying to expand their business further, the services are now billing themselves in TV and radio ads as friendly to novice home buyers. But many traditional mortgage brokers, undoubtedly fearful of being replaced by the new technology, preach caution.
What everyone agrees on is that you'll save money by buying a mortgage online. Real-world brokers can't possibly scan the thousands of loans issued daily for the best possible deal for each individual client. Web-based services do that automatically, by matching your preferences with their vast databases of loans from their lending partners. Their preliminary online questionnaire asks whether you're pursuing a new loan or refinancing, where you're buying the home and what type of loan you want (fixed, adjustable, with or without points). Then they present the best applicable rates, at which point there are tools to calculate and compare your monthly interest over time and pick the best offering. Finally, brokers typically charge 1.5 percent of the entire loan as commission; the online services charge less than half that.
Once you fill out the preliminary application online, the sites operate differently. E-Loan and HomeShark process the loan themselves. At E-Loan's new headquarters in Dublin, Calif., a staff of 170 underwriters, processors and customer-service staffers scurry about, FedExing applications to customers, answering questions by phone and e-mail and ordering appraisals. Procedures are similar--if a little more cramped--at HomeShark's offices in a refurbished coffee warehouse in San Francisco. Both services mediate between buyer and lender until the deal is closed. Bypassing the lender ""simplifies things for the consumer and puts the burdens of coordination on us,'' says HomeShark CEO Ned Hoyt.
By contrast, on the Microsoft and Intuit sites, the companies turn the transaction over to the lender as soon as a customer picks a rate. The lender then processes and closes the loan. These two sites present their lending functions in the context of a larger set of services. Microsoft's HomeAdvisor, which went live in August, offers a database of half a million home listings, along with tools to research neighborhoods and expert advice on the buying process. Intuit's Alison Berkley says her company is working to integrate its loan service with its popular tax and financial-planning software. The two companies are trailing the E-Loan and HomeShark start-ups in the number of lenders who offer loans through their site, and are working to catch up. Another site, GetSmart.com, also offers tools to compare mortgage rates along with other types of loans and refinancing.
Before you jump online with your home deed in hand, there are several caveats to keep in mind. The sites don't yet offer many complex mortgages, like construction or loans with multiple buyers. Also, all four services began on the West Coast and sometimes don't offer the same breadth of lenders in Eastern states--particularly those with arcane mortgage laws like New York and Florida. IPI Financial Services president Doug Naidus says you can make sure you're getting a good deal by comparing the rates of the national online services with traditional lenders, or local online lenders like IPI's own site for Manhattan, www.nyfinance.com.
And while the loan sites insist that online borrowing is for first-timers, too, many real-world brokers say otherwise. Though the services generally do a good job of defining those mouth-drying concepts like ""negative amortization,'' brokers say that the Net can't replace a professional who helps clients slice through the voluminous paperwork and answers questions they don't even know to ask. ""You just don't get that kind of counseling online,'' says Charles Moore, a Bay Area real-estate agent since 1972. Moore also points out that if interest rates fall after you lock in your loan, a friendly broker might let you switch to the better rate, whereas the online lender (depending on the type of loan) will not.
Most industry watchers, on the other hand, think the real risk for today's home buyers is not looking online. ""If you don't, you'll have the very biased loan samples of mortgage brokers who may not find the best deal for you,'' says BankBoston Robertson Stephens analyst Gary Craft. The home mortgage is the most important financial transaction a family will ever make. Loan seekers should empower themselves with the best tools available.
GET YOUR LOAN HERE.COM
The various home-mortgage sites on the Web offer different kinds and levels of services. Here's some of what's available:
E-Loan www.eloan.com
Offers mortgages from 60 lenders to home buyers in 39 states. Handles the entire transaction, online and via FedEx.
HomeShark www.homeshark.com
Similar service to E-Loan, with 16 lenders servicing 46 states. Also features a searchable database of 1 million home listings.
QuickenMortgage www.QuickenMortgage.com
Intuit lets you compare rates from 11 national lenders. Then it hands the transaction to the lender that closes the loan.
HomeAdvisor www.homeadvisor.com
Microsoft's new service is similar to Intuit's, but with only four lenders. It aims to be an overall home-buying guide.