Is A Mortgage A Cut & Dry Commodity?

Absolutely not!  A mortgage is not a car loan or credit card where your credit is reviewed and you “state” your income.  Not only is a mortgage an extremely arduous process it’s also about what is the right product for you and your family.  Below is an email that was written to me by someone I know that bought a property in another state that I do not lend in and I advised him against using the big bank he chose because they had the lowest interest rate.  The deal would not have closed without my guidance on what to do.

I went into the transaction thinking that the house and the mortgage were two separate things. I figured it would be normal to get emotional about a house. It is a very personal decision. No two houses are alike, and although costs certainly matter, they matter in a way that is related to how much enjoyment I figured I would get out of the house. On the other hand, I viewed the mortgage as a cut and dry commodity. They all looked alike to me, so the best mortgage would be the cheapest one with lowest rate that would approve me. It seemed pretty simple. In other words, I treated the house purchase as an emotional luxury goods decision, and the mortgage as a logical investment decision.

I was right about the house. It is very emotional. I was wrong about the mortgage.

First, mortgages are not all alike. The biggest features where they differ from each other are the service of your mortgage rep, and the chances the mortgage is approved in a timely manner so that the transaction can close. I had heard about this before, but I didn’t understand why it would be such a big deal that it would worth paying extra for a better lender. Unfortunately, this only became clear after the fact.

Second, I failed to realize was that the house and the mortgage are a package deal. Once you make an offer or sign a contract, you feel very (emotionally) invested and can’t fathom what life would be like without the house of your dreams. Further, you may even have a sizable deposit that you are now very afraid of losing (that is a real cost, but your emotions magnify that as well). Because getting the house requires that the mortgage closes, you are now channeling all of your emotions into the quite arduous process of closing a mortgage loan. This process can be extremely difficult, and its difficulty is directly a function of the skills and service of your mortgage rep. If documents are not in order, or various parties aren’t properly communicating, you are sitting there feeling helpless, worrying that these people will force you to lose your house which you have already decided is an unfathomable disaster. People (including me) will spend thousands of dollars extra to get the house that is just right, because any flaws would drive them crazy. But, getting a great house with a bad mortgage amounts to having a major flaw about the house. In fact, the better and more unique the house, the more critical it is that the mortgage service is top notch, so that you can assure you won’t lose it, or spend months worrying that will lose it.

I can’t overstate the importance of the transaction anxiety. Even if the transaction doesn’t fall through, that worrying is extremely costly for a couple of reasons. Obviously it is costly to worry and have anxiety, and you will be forced to spend lots of time on the phone tracking down people to make sure they are doing their job. Those are the direct costs of transaction anxiety. It is large and larger than you expect.

But there is also an indirect cost. As you have anxiety about the transaction, it is human nature to start creating layers of emotional defense. The mortgage process sucks, so it starts to bleed into your feelings about the house: “Should we have bought this house? Maybe the house isn’t so great, and we should take this opportunity to walk away.” Walking away is very costly, and it would probably be a mistake. But suppose you are strongly considering walking away and go through the transaction anyway. You will wind up not liking your house as much as you did because you allowed yourself to become quite critical in the midst of wringing your hands about the mortgage. Instead of arriving at your new house with unbridled enthusiasm, you put on a brave face and try to like what you are now “stuck” with. Its hard to put a price on paying hundreds of thousands of dollars for something that you are no longer excited about. All of this is emotional and artificial, but its root cause is the negative emotions that emerge from a shoddy transaction.

So to me I would think of it like this. Since I bought a new house I was able to select extra features to customize it. There were many occasions where I considered an option and thought, “Well, that is $2,000 extra, and I don’t really need it. But what if I want it later? That is really not too much money amortized over the life of the loan. I spent all this money so my house could be perfect. Let’s just do it. I don’t want to regret not having a (fill in the blank: vaulted ceiling, upgraded carpet etc.)” I wish I would have viewed the mortgage the same way.