As a consumer or a realtor you want to get the "best deal" for yourself or your client. Because of this when one goes shopping for a mortgage there are a few things you should know that is rarely in print.
No Point no fee loans - So how do they get paid?
YSP aka "Yield Spread Premium" or Rebate is a commission paid by the bank to the loan officer. When a lender provides a daily rate sheet there will be a list of different rates for 1 loan program ranging from low to high. The higher the rate the more "YSP" the lender will pay the loan officer. You will find a rate on the rate sheet that is at "PAR" meaning that if you elect this rate the loan officer receives no compensation from the lender and will pass the cost on to you. Some rates are lower than the "PAR" rate and you as a consumer will not only pay the loan officer and other fees, you will also pay a "discount" point or fee.
Why would a lender allow a loan officer to raise the rate to make more money?
In some circumstances the person borrowing the money may decide to stay in their home short term or may decide to pay the home off in a relatively short time. In this case it is cheaper to accept a higher rate with a higher monthly payment than it is to pay the loan fees.
When should you pay fees and why?
If you plan on keeping your home long term (4-5 years) it is usually cheaper to pay fees for a lower rate and payment.
Example: Assume no fees on a loan amount of 250,000 with a rate of 6%, 30 year fixed the Principal and Interest (P&I) payment would be 1,498.88
Assume 3,500 in fees with the same loan amount, rate of 5.25%, 30 year fixed the P & I payment would be 1,380.51
The difference in monthly payment is 118.37. So, 3,500 divided by 118.37=29.57 means it would take 30 months to break even on your closing costs.
If you stay short term (2 years) the higher rate would be cheaper than paying fees for the lower rate. 118.37 x 24 months = 2,840.88. This is cheaper than paying 3,500.
If you stay long term (5 years) then the loan with fees would be cheaper. 118.37 x 60 months = 7,102.20 - 3,500 = savings of 3,602.20
If you stay really long term (15 years) 118.37 X 180 months = savings of 21,306.60
If you stay the course of 30 years then 118.37 X 360 months = savings of 42,613.20
No fee and fee based loans are neither good nor bad. It all depends on your situation.
Discount Points?
If the PAR rate is 5% and you want 4.5% and plan on keeping your home for a very long time it may in some cases make sense to pay discount points. This fee goes directly to the lender not the loan officer or broker.
When a bank makes YSP from raising your interest rate they do not have to disclose it to you anywhere.
When a broker makes YSP from raising your interest rate they MUST disclose it to you on the good faith estimate, estimated settlement statement and on the final paperwork you get at loan closing called a HUD1 final settlement statement.
Rate shopping
Rates are influenced by the purchase and sale of mortgage backed securities. They are traded daily on the bond market. Because of this rates change daily. And in this climate they have been changing several times a day. To compare rates fairly one must get a quote within a short time frame (1 or 2 hours) from the lenders they are considering using. If the rates change during this window then one cannot fairly compare what a lender is charging to another. As a result of this dilemna mortgage brokers evolved.
Mortgage brokers receive rates from lenders at a wholesale prices, meaning lower rates than the lenders offer their retail clients. As a result many brokers receive their compensation directly from the lender not the customer.
Brokers also have the ability to shop a multitude of lenders. Our company has 299 lenders in which to choose. If we can't find you the lowest rate chances are you probably won't find it either.
Bankers rarely have other programs except their own (some do broker) but they do have the ability to have your files underwritten in house. Sometimes this can help speed up the process.
Nevin is a professional mortgage loan broker originating residential loans in the following states: California, Oregon, Washington, North Carolina and commercial loans in all 50 states. Memberships include: Society for Business Ethics, National Association of Mortgage Brokers, California Association of Mortgage Brokers, Veteran of Foreign Wars, !st Cavalry Division, Cary Chamber of Commerce and Civitan International.
Call or e-mail me for current mortgage rates or real estate related questions!
Nevin's services include property & casualty insurance, personal budgeting, financial planning, retirement planning strategies, sales training and real estate contract review.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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Well done my friend!
The examples you used here make it clear for all to see which way they should go when looking for the terms of a loan.