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Cramer: For Great Mortgage Deals, Play Small Ball

By Jim Cramer

These days you can’t swing a dead sub-prime loan without hitting a big bank that is in even bigger financial trouble. Citi (Stock Quote: C), Wachovia, Washington Mutual and Bank of America (Stock Quote: BAC)—the list goes on and on, topped by some of the biggest household names in the banking world.

Seeing big banks in trouble like that gives me pause, especially at a time when I’m looking to get more involved in the real estate market, and when I’m in the market for some good mortgage deals.

Even with the behemoths teetering on the brink, I still believe I can get a good mortgage bargain. I recently wrote how the Federal Reserve had been buying up debt from mega-home mortgage lenders Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE). That plan worked well up to a point. In early January mortgage rates fell to around 5%, and in some locales, the rate fell lower than that.

But that was in early January and if you didn’t strike fast, you may not have gotten those bargain-basement rates. As of January 26, 30- year fixed home mortgage rates climbed more than 40 points from the week before, up to 5.48% from 5.05% last week, according to the daily mortgage rate index from our partner site, (a great resource, by the way, for not only tracking home mortgage rates, but for CDs, auto loans, credit card rates and much more).

Why did mortgage rates spike so high and so fast? I suspect that the big banks weren’t too eager to climb back into the home lending market, especially with rates that led to narrow profit margins.

There’s a somewhat artificial veneer to the lower rates we saw earlier in January, with the Fed pumping up to $500 billion into Fannie Mae and Freddie Mac to help bring interest rates down. But the underlying economic problems, especially declining home prices, higher unemployment and an anxious credit and risk climate, have big banks skittish. Not too many of them can justify a 5% return on investment in such an uncertain economic landscape.

Still, even mortgage rates in the 5.50% range are a good deal, if you look at the history behind mortgage rates over the past few decades. Certainly, you can still get a good deal on a home loan, but I also happen to think you can do even better.

How’s that? By taking your business to a smaller bank to get your home loan.

Small Banks can Equal Great Deals

Small, community banks get short shrift in the financial media. They’re stodgy, kind of boring, and they don’t sponsor golf tournaments or run ads during the Super Bowl.

But they do offer great mortgage rates, often with low fees and with superb customer service. I recently got a mortgage on a new home. I scouted around, even to bigger banks that I have my money in, but they all refused to deal with me and all refused to even consider me as good credit. Locally, though, my banker knew me and, more importantly, KNEW THE HOUSE and recognized its worth and was thrilled to give me a decent loan at a great price.

I’m hearing more and more stories these days about homebuyers who are getting mortgage rates at smaller banks that are a point or more less than the big banks, and who are saving thousands of dollars in fees on the deal, too.

The numbers seem to back that up. According to the Pacific Coast Bankers’ Bank, loans for smaller financial lenders (defined as having less than $1 billion in assets) rose 6.8% in the third quarter.

That’s at a time when home loans from bigger banks were in decline.

Bigger banks are running risk averse these days, and are increasingly reluctant to take a chance on a borrower who lives thousands of miles away.  Local banks know their communities, have a fair sense of the economic climate, have the local housing market down cold and can make better lending decisions on the ground, usually meeting prospective borrowers face-to-face. Often, borrowers can even meet the bank president and shake hands on the deal.

Try doing that with Bank of America CEO Kenneth Lewis.

Customer Service Matters
Customer service is another big benefit. I hate calling robotic 1-800 numbers to get someone from customer service to answer a question.

Who wants to do business with someone who thinks their time is more important than mine? With a community bank, you can call up the local number, or even drop in while you’re out picking up the dry cleaning.

Plus, a kind of chemistry develops when you deal with people face-to- face. They often have a harder time saying no to you. On the contrary, 1-800 lines are actually designed to say no to you, with the cruel added twist of having to navigate seven levels of automated messages to find out you’re not going to get the help you need.

My advice in going to a local bank starts with using Find out the competitive mortgage rates in your area, then contact each bank to get more information. And before you talk turkey with a local lender, go back and use the mortgage calculator to see how much loan you can afford. Or, if you’re refinancing into a lower mortgage rate, use the break-even calculator to see how long it will take you to break even on a refinancing deal.

Once you get to the “serious” stage, go ahead and negotiate terms.

The community bank’s brand of localized service lends itself well to negotiations. You’re often talking to the person making the lending decision, and that should increase your odds of getting a better deal. After all, smaller banks want your business and are more flexible about giving you flexible terms to get your business. It’s not that all big banks are bad, but you have to go though layers of bureaucracy to get an answer, and it’s usually non-negotiable.

Then, check to see that the local lender you’re working with is FDIC-insured. Once those hurdles are cleared, you’re on your way, hopefully to a great home loan.

So call me a convert, but I’m beginning to think that when it comes to getting the best mortgage deals, good things do come in small packages.

—Brian O’Connell contributed to this article.

Still skeptical? See for yourself. Go to sbup and type in your zip code and select your state. On the next page enter the mortgage type, say 15-year fixed or 30-year fixed. Then peruse the smaller banks in your area for a good deal. Chances are, you’ll see a slew of good mortgage deals for under 5.50%, with fees under $1,000 (always a good sign), and great APRs.

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