Online Lenders: Bidding for You - Internet bids for mortgages

Kiplinger's Personal Finance Magazine, May, 1999 by Elizabeth Razzi

* But you can't compare rates until after you've filled out the application.

Can the same online auction techniques that work for buying Beanie Babies and baseball cards work for the largest financial transaction most people ever make? Maybe--but for now, don't take the "name your price" pitches for online mortgages too literally.

At least two Internet sites promise to put your mortgage application on the block to get you the lowest interest rate. MortgageAuction.com guarantees the lowest rate and backs it up: If you find a better deal elsewhere, MortgageAuction.com promises to pay $250 toward your closing costs. Unfortunately, you have to complete a lengthy application to get rate quotes.

The site puts your application up for auction, along with your credit scores, for 24 hours. Currently, up to 50 lenders--depending on how many are licensed to do business in your state--can bid on your loan.

MortgageAuction.com reviews the bids and proclaims the one with the lowest annual percentage rate (APR) the winner. Borrower and lender are each notified by e-mail. You won't have any credit-application fees charged to your credit card unless you agree to proceed.

APR, however, is not as useful a gauge for mortgages as it is for other types of credit, mostly because people tend not to keep the loan for the full 30 years on which the APR, which includes points, is figured. If you plan to keep the loan only a couple of years, a low- or no-points loan (with a higher APR than a lower-rate loan with points) could be the cheaper deal.

You take more risk with Priceline.com. The site asks you to name your interest rate and terms. In practice, however, you're more likely to get a counteroffer from one of up to four lenders who review your bid (and your credit scores). You can choose whether to accept the counteroffer, but the rate is not guaranteed until you lock in later.

A lender who accepts your offer through Priceline.com may charge a $200 application fee to your credit card. You won't be told whether it's refundable until after you are charged. Typically, the tee will be credited toward closing costs if you choose the loan.

What if you bid too high? Mitchell York, president of LendingTree Inc., the company that handles mortgage auctions for Priceline.com, says that borrowers who bid too high have actually been countered with lower deals. "If they qualify for 7%, they're going to get 7%," he says.

GIVE THEM A PASS. One of the biggest drawbacks of the online-mortgage sites is that you have to take them at their word that they can find the lowest rate--at least until after you've applied and allowed them to pull your credit report. Repeated credit inquiries can damage your credit score, although inquiries for mortgages and car loans in the past 30 days don't count against your score. And inquiries clustered within a 14day period count as only one inquiry.

If you decide to try out an online-mortgage auction, comparison-shop first. Neither site posts daily updates of average mortgage rates, but that information is available from sites such as Homeshark.com, Quicken-mortgage.com and Kiplinger.com.

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