In my opinion, there seems to be a lack of trust between lenders and borrowers – and for good reason. This obstacle is easily overcome when the borrower understands the loan process and the costs involved in borrowing money.
A competent mortgage broker will educate clients, empowering them with information that will eliminate the mysterious anxiety that grows from not understanding how real estate financing works – or in other words, how much money was made off of the transaction by the broker and other service providers. It’s all in the pricing.
What goes on with your loan after you receive your money is a mystery to us all. Obtaining the best loan available for your particular set of circumstances is our focus.
The Important Variables
The variables in pricing a mortgage loan are the interest rate, the fees paid to service providers to facilitate funding the loan, and the compensation to the broker or bank arranging the loan (generally referred to as points, or an origination fee). Rebates, or yield spread premiums as they are sometimes referred to, are adjustments associated with pricing the interest rate, and of which an informed borrower should be aware.
As a rule, it is a bad idea to pay any sum of money to any service provider, with the possible exception of a licensed appraiser, prior to funding your loan.
Myth: no cost loans. There is no such thing. Can you think of anything in the world of finance that is actually free? How can a business sustain itself in a capitalistic society when not charging for services? A no cost loan is synonymous with a higher interest rate.
Follow these steps to negotiate the best mortgage loan rate and terms for your specific situation.
Shop at least three lenders for the rate that applies to your given situation. Rates can change several times daily, but only in small increments which will not typically require a new rate quote on any given day. A qualified professional will be able to provide you with the lender parameters which apply to you.
Knowing the current interest rate, you can now identify the fees, and to whom the fees are paid. The rate you have been quoted should not change as a result of the disclosure of fees. Fee information is provided on a legal document referred to as a Good Faith Estimate. Understand this fact: if there are no fees, you could have received a lower interest rate.
3. Origination Fee or Points
Nobody works for free. Ask the broker how she/he is compensated. Typically, the broker or bank will charge a fee that is based on a percentage of the loan amount, referred to as points, or an origination fee. This fee is negotiable, but generally in the range of 1-2 percentage points of the loan amount funded. If there is no origination fee appearing on your Good Faith Estimate, then your originating broker or bank was probably compensated through a rebate or yield spread premium. Ask – and ask the amount of the rebate. In most cases, it is less expensive – and much less confusing – to pay the origination fees and eliminate rebates.
4. Rebates or Yield Spread Premiums
The longest running and best kept secret in the mortgage industry is the rebate, or yield spread premium paid to the broker and/or bank for selling you a higher interest rate than what you bargained for. If your mortgage loan originator (broker or bank) tells you they are being paid through an origination fee or loan points, tell them that you want to be reimbursed any rebate or yield serviced premium that results from locking the interest rate. This demand will quash the motivation of the originator to collect an additional fee at your expense without your knowledge.
Rebates and yield spread premiums do have their place in the mortgage market. A reputable mortgage originator can advise you of the appropriate situations for using these little known interest rate pricing adjustments.