Online mortgages have been available for several years now, but they still appeal mostly to a few Web-savvy people who have been through the mortgage process before.

The online mortgage business grows slowly. According to the TowerGroup research firm, online loans will make up only 12 percent of mortgage volume in 2005.

Those percentages are pretty low, but the dollars are in the billions.

Better deals, fewer buyers
Human nature is one reason for the relative lack of interest in online mortgages: When people borrow six-figure sums, they prefer to talk with the lender or broker face to face. Especially when they're buying a house and not refinancing a current loan.

People in the industry talk of channels -- the online channel is the Internet; the offline channel is everything else. "There's no real reason to use the offline channel other than the fear of the unknown," says Chris Larsen, founder and chairman of E-Loan, a prominent online lender.

Larsen might be right -- he says he and his online competitors offer better rates and fees than their offline counterparts while offering better service -- but there's no escaping the reality that buying a house and getting a mortgage are scary activities. For online lenders, the goal is to make the process friendly, transparent and quick, while saving customers' time and money.

Online lenders' Web sites are friendly in several ways. They look good, and many online lenders allow customers to fill in some information on their online applications, save what they've entered, and return later to complete the applications. Most lenders post their toll-free phone numbers prominently and can be reached by e-mail and sometimes by online chat.

They're transparent in the way they explain rates and fees. Highly regarded IndyMac Bank even researches its main competitors' rates and fees daily and tells prospective customers who is offering the best deals. Customers will comparison-shop anyway, so the bank might as well help, says Chris Edwards, who manages the business-to-consumer Web site for IndyMac Bank Home Lending.

"Your Web site is only one click away from another Web site," he says. "People are rarely going to buy from the first rate quote, the first place they visit." Besides, Edwards says, IndyMac offers to beat its competitors' deals by $300. (Other lenders offer guarantees, too; E-Loan offers a $500 to borrowers who find a better deal; Countrywide will eat certain closing costs if they're above its estimate.)

High-speed loans
Finally, online mortgage lenders have taken pains to make applying for a mortgage a quicker process. The applications are interactive and as short as possible. For example, if you indicate on an online application that you're single, you won't be asked for your spouse's name and Social Security number. An application might ask how long you've had your current job, but not who your employer is. That question will come later, when you receive a packet of papers to read and sign.

Online lenders strive to give preliminary loan approval within minutes. Many lenders tie their online applications to loan-decision software from Fannie Mae or Freddie Mac, so they can deliver decisions on conforming loans fast. Applicants who don't fall under the conforming guidelines (perhaps because they have flawed credit) usually are asked to call a toll-free number to talk to a loan officer.

An exception is IndyMac, which has developed software that allows the bank to make instant decisions not only on conforming loans, but on low-documentation, subprime and jumbo loans, too.

Even with these features, online lenders mostly attract customers who already have home loans. Lenders are trying to figure out how to attract more home buyers so they'll still have customers when the current refinancing boom ends.

Home buyers still window-shopping online
IndyMac Bank attracts the attention of a lot of home buyers who don't follow through. Buyers fill out more than half of the bank's online applications, but account for less than 20 percent of closings. More than 80 percent of the loans that actually close come from homeowners who are refinancing.

In other words, when home buyers fill out applications on IndyMac's site, most of them drop out and end up getting a mortgage with another lender. People who are refinancing their current mortgages tend to fill out an online application and stick with it.

The question is why.

"When you apply online, you don't have the face-to-face relationship with us," Edwards says. On the other hand, "when you purchase a home, you tend to have a face-to-face relationship with the Realtor, and the Realtor is motivated to place the loan with someone they refer to."

That's the most common explanation that IndyMac gets when the bank asks applicants why they changed their minds. IndyMac is looking for ways to develop relationships with real-estate agents to get more referrals.

There could be another reason that home buyers shy away from online mortgages: stress. Buying a house is an emotionally wrenching time. You worry that you're buying the wrong house, or that you paid too much, or that the roof will need replacement a year after you move in, or that the movers will be late, or that a glitch will torpedo the loan closing at the last minute. At night, you're awakened by a nightmare featuring peeling lead paint, a job layoff the day after loan closing, and a dead cat stuck in the chimney flue. And you're expected to trust a lender whom you've never met?

When you're refinancing a mortgage, you already live in the house, so there's less to get stressed out about. A delay in the closing isn't as inconvenient.

Either way, online lenders like to follow up on applications with phone calls. "People still feel more comfortable speaking with somebody on a decision like this," says Edwards of IndyMac. "They're not completely comfortable with the transaction until they speak to somebody. It's not like buying a stock just yet. It's still a personal transaction."

In the future, the process will become so automated that loans routinely will be closed in just a couple of days, Edwards predicts. If he's right, there will be little need nor time for phone calls, and everything will be done online.

Indeed, we seem to be moving in that direction. After all, just a few years ago, few people would have considered a phone call from an out-of-state loan officer to be an example of the personal touch.