Shop for Loan Rates
With Just a Few Clicks

August 11, 2004 -- When Debbie Donathan-Price decided to refinance her home early this year, she used the Internet to find the rates. But once the Dallas homemaker located a loan she liked, she returned to paper and pen to complete the process.

Ms. Donathan-Price's experience is typical of the way most mortgages today are found and processed. More than half, or 55%, of mortgage shoppers searched for a mortgage online in 2003, but only 7% of borrowers made the move from online mortgage shopper to online mortgage borrower, according to data from TowerGroup, a research firm in Needham, Mass.

The eagerness to go online -- and the reluctance to take the total plunge -- isn't surprising. The Web has made it easy to search for a better rate and lower fees. But many people are wary about testing new technology on something as important as their home loans, and the number and diversity of options offered in new online programs has added to the confusion.

"This is a big financial commitment," says Ms. Donathan-Price. "I'm not sure I trust the Internet enough yet."

Consumer reluctance isn't the only reason many borrowers are shopping for, but not completing, loans online. Three-quarters of lenders provide information about their loan rates and products online, making the Internet the best marketplace for searching for rates. But only about 15% have the technological capability to let borrowers take the next step (filling out applications, receiving loan documents and tracking loans online), according to Craig Focardi, a senior analyst at TowerGroup.

Here's some advice on how to go about both shopping and borrowing online.

Shopping

When shopping online, lenders will ask you to fill out preapplication forms before they match you with rates. "Pre-apps" give the lender your basic financial information, including permission to check your credit report.

Some people avoid filling out a lot of pre-apps for fear that a slew of credit checks will hurt their credit score. But this is a mistake, says David Chung, vice president of business development at CreditXpert Inc., a Towson, Md., provider of software that tells people what effect their purchases might have on their credit scores. Yes, you risk taking a hit the first time a lender checks your credit score. But every check thereafter within a 14-day period should have no additional effect on the score, says Mr. Chung. In other words, you will see the same drop in your credit score when you apply with just one lender as you would if you were to preapply with two dozen lenders -- as long as you keep the applications within 14 days of the first one.

In addition to using the Internet to search for rates, you can take advantage of the online calculators that let you play around with different loan structures, from variable-rate mortgages to the 30-year fixed. The tools and calculators section on the Web site of Bank of America Corp., Charlotte, N.C., for example, can help you decide how big of a house you can afford by tabulating your monthly payments, yearly property tax, interest rate and insurance. You can also calculate the answers to questions such as how an adjustable-rate mortgage would affect your monthly payments and what size house you can afford. Narrowing the loan terms you want will make shopping for a rate a lot smoother.

Shopping online might also help you locate other kinds of mortgage deals. For example, guaranteed closing costs -- a promise that the price quoted for services such as the title and appraisal won't change at the time of the closing -- are one of a number of options. Netherlands-based ABN Amro Holding NV's Mortgage.com has offered a guaranteed option, called OneFee, since 2001. Amerisave Mortgage Corp., based in Atlanta, launched a similar option in March, including an offer of $300 to consumers who can find a better deal elsewhere, backed by a good-faith estimate.

One thing to keep in mind: Online mortgage shopping can be less beneficial for those who are seeking anything other than the most common type of loan. When Thomas Sudow, executive director for the Chamber of Commerce in Beachwood, Ohio, went to refinance his home last year, he had less than 10 years of mortgage payments left and wanted to replace that with another 10-year loan. Online, however, Mr. Sudow had a hard time finding fixed 10-year mortgages, and eventually had to abandon the online search and start calling lenders.

And Bill Baker was rewarded for taking his search offline when he refinanced his Milford, Conn., home earlier this year. After looking at rates online, he decided to call a local bank that he had used for a car loan in the past. The bank offered him a rate as low as anything he could get online, with "none of the fees," Mr. Baker says. Still, Mr. Baker is glad he searched online. "I got a feeling for what the rates were and a feeling for what the fees were," he says. "I became a smarter consumer."

Borrowing

If you choose to work with a lender that can handle your loan application online, you stand to benefit from a speedier loan process, improved transparency and, increasingly, the convenience of never having to leave home.

Dan Dudak found his online refinancing to be much better than his offline experiences. The first time he refinanced, Mr. Dudak waited six months for the loan to close and was constantly questioning the cost. "Getting the process moving was hard, and seeing the costs and the fees -- it was like pulling teeth," says the Long Beach, Calif., resident. By processing the loan through the online site of E*Trade Financial Corp., New York, he enjoyed a faster close (three weeks) and greater control over the loan process through an online tracking Web site.

If you want to process your loan online, there are some basic services lenders should provide. You should be able to complete the application online, downloading necessary documents as they become available. And it's best if you can save unfinished forms and retrieve them later since they can be long and you may not be able to complete them in one sitting. Also, a lender should provide a secure site where you can look at all your loan information whenever you choose. This way, you can track your loan status to see what needs to be completed, such as the visit from the appraiser or the setting of a closing date. A secure site will require that you set up a password to access the information.

Lenders that provide such services include ABN-Amro's Mortgage.com; Bank of America; E-Loan Inc., Pleasanton, Calif.; E*Trade; Countrywide Home Loans, a unit of Countrywide Financial Corp., Calabasas, Calif.; and Quicken Loans Inc., in Livonia, Mich. More lenders are increasingly offering these technologies, but there is still a lot of disparity, so it's best to ask first.

No matter which lender you choose, the process will be a hybrid of online and offline work. Quicken started a unique e-signature system several years ago that allows its borrowers to keep more of the paperwork on the Internet. Many loan documents, such as good-faith estimates or interest-rate disclosures, can be signed electronically and returned at the click of a button. Otherwise, borrowers would have to sign forms by hand and return them by fax or mail.

But the final loan-closing papers still must be signed by pen as well, because of the requirements of local governments that process and record mortgage documents. So if you want to process your online loan without ever leaving home or office, you'll need one more thing -- a lender willing to come to you for the closing. And, if you ask, some will do just that.

Email your comments to rjeditor@dowjones.com.