How Do I Know If I Am Getting A Good Rate?

By
Mortgage and Lending with Jacob Dean Mortgage

virginia mortgages by East West Mortgage of Virginia

 Wow. Any loan officer that has been in the business for more than 20 minutes has heard this question. Without selling you ANYTHING, let me give you a couple quick pointers to help determine if the rate, points and fees you are getting quoted are actually competitive.

 First, you need to understand how the person originating your mortgage will be compensated. After all, we don't do this for free. I get paid one of two ways. I can give you the absolute best rate that you qualify for and get paid a fee by you directly in the form of a broker fee or origination fee. This is normally expressed in terms of "points", 1 point representing 1 percent of the loan amount. I can also be paid by the lender to sell you a rate higher than what you qualify for which will require less upfront points, sometimes no points at all. The "premium" being paid to the loan originator represents a "yield spread", so you may see the term YSP or yield spread premium on your settlement statement. Sometimes, the premium paid by the bank is high enough (because the interest rate is so high ) to even pay closing costs. This is part of the way lenders offer no closing cost loans. The fees have to get paid, they are just paid out of the proceeds of the loan because the borrower is willing to pay an above-market rate. It is important to understand that points and fees are directly related.

 So how do you compare fees? You need a GFE or good faith estimate that is as accurate as possible. Quotes over the phone or internet are completely useless unless accompanied by a good faith estimate correctly filled out by the loan officer after reviewing your application, credit and desired loan program. Comparing two estimates side by side and line by line will help illuminate any extra fees.  Keep in mind that some GFE's will not include title fees, recording  fees or taxes, title insurance, etc. just to appear that the fees are lower. Also, a rate may not be available unless you lock it in that day.

 Another indication of loan comparison is (or should be) the Annual Percentage Rate or APR. All things being equal, a higher APR compared to a similar loan with a lower APR would reflect a higher cost to the borrower. Keeping that in mind, most Truth in Lending statements are not filled out correctly, so the APR does not reflect true costs. This is most common with adjustable rate mortgages. If your APR is significantly higher than your interest rate, be sure to understand why.

Remember, you DESERVE (and we are required to provide) an accurate and complete Good Faith Estimate within 3 days of completing your loan application and anytime your loan terms change, unless there has been an improvement.

 About the Author: Brian Piper is a Senior Loan Officer with East West Mortgage in Vienna Virginia, one of the largest brokers in the country. Also online at www.VirginiaLoanPro.com

Comments (13)

Rachel Jones
Charles Rutenberg - Islandia, NY
Cert. Short sale Specialist, Long Island Realtor L
This was to the point, and quite accurate. Thanks for sharing; however, I think that you also need to point out that sometimes a ysp is NOT an option because of the persons credit and or program that they are qualified for.
Aug 28, 2007 04:08 PM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Brian,

I've been in lending and real estate since 1969 and I'm convinced that the only protection that the consumer has is the personal integrity of the loan originator.

Your only point I question is that "APR" is wrong because the form is not filled out properly. Your statement may be true at least part of the time, but you can be sure that "APR" is always wrong if the "Truth in Lending" form is filled out properly.

"APR" was a great idea that has never been figured out. As it is calculated it can never be correct unless the loan is keep until fully amortized! Our Grandparents and/or Great Grandparents paid off their loans by making 180, 300, or 360 payments, but today most loans are paid off in 5 to 7 years regardless of their term. Who among us has been to a mortgage burning party? They were once common, shortly after a couples silver anniversary.

Fixed rate loans will have lower "APR's" if there is a discount paid for a lower rate. The dirty little secret is that for most of the first 5 years it's a higher cost loan.

Variable "ARM's" are only disclosed to the point of being "Fully Indexed" which is the rate when the margin is added to today's index. If you start "Fully Indexed" the potential encrust of 5 to 6% isn't considered. If you start with a "Teaser" rate "APR" only includes the increases to "fully Indexed" not the full potential increase.

"APR" could be fixed (Don't hold your breath, It'll never happen!), but it wouldn't change anything the consumer's only protection would still be the personal integrity of the loan originator.

Bill

William J Archambault Jr

The Real Estate Investment Institute

First National Mortgage Sources

Aug 28, 2007 04:36 PM
Chris Breck,
Advantage Title Company - Nationwide - Baltimore, MD
Advantage Title Company

Brian,

As Kramer once said "The cat, raaaaaarr,  is out of the bag". Many borrowers frown upon the YSP, but like you said the originator will be compensated. YSP is not a bad thing as long as it is not accompanied by thousand of dollars in junk fees. YSP is a nasty industry secret that in all honesty should not be.  It is similar to the title industries dirty little secret that you can get a break on title insurance with a reissue rate, even on a purchase. But Shhhhhh don't tell anyone.

-Chris,

 American National Title

Aug 29, 2007 04:05 AM
Christy Powers
Keller Williams Coastal Area Partners - Pooler, GA
Pooler, Savannah Real Estate Agent
Great post!!!
Aug 29, 2007 05:33 AM
Brian Piper
Jacob Dean Mortgage - Vienna, VA
BestVirginiaHomeLoans.com

I will not dispute how good or bad YSP is for the borrower, but if brokers have to disclose it, then so should bankers. Currently, bankers including, correspondent lenders, are not required to disclose YSP on the good faith estimate.

As far as it being a dirty little secret, I have NEVER seen YSP disclosed on car loans, yet you can be sure that dealer financing is not just a nice little freebie.

Aug 29, 2007 05:36 AM
Kurt Jackson
KJ Financial - Kansas City, MO

I have to agree with William on the personal integrity of the LO on the deal.  I know how to read a GFE, I know how to complete one, I know how to calculate APR according to the government's guidelines, but I can't tell you whether or not someone is lying on their GFE.  I may suspect it, but I can't prove it until it is too late and the client is at the closing table, then it's too late. 

It's unfortunate, but it happens all to often and the consumer is the one taking it in the shorts over it. If the client doesn't know any better they go with the one they think is cheapest, so sometimes they are the windshield and sometimes they are the bug.  Until the mortgage and real estate industry does something to stop this from happening or the government gives some teeth to their regulations the consumer will continue to chase the best liar out there.  It pays to work with a true professional. 

Aug 29, 2007 06:08 AM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Brian,

There can never be disclosure of YSP, Yield Spread Premium, from Banks for no such thing exist! By definition YSP is a payment to a Broker from a lender.

If a Bank portfolios a loan, holds the note, the Yield is just part of their gross profits. If a Banks portfolio, the notes they are holding, average of say 6.000% and their funding them from 2.000% CD's the portfolio yields 4.000% that is the Spread. YSP is simply sharing part of the Spread with the Originator that made it possible.

Most lenders sell their loans, loans with a higher average rate are worth more than others of the same credit grade, when sold the deference between cost and the sale price is called PROFIT (loss is always a possibility, that's part of the sub-prime prolmem) Banks don't/can't report what remains an unknown at the time it's originated. Yield and Profit may be anticipated, but remain unknown.

Disclosing YSP is not for the public's benefit but rather designed to drive a wedge between the brokers and the consumers. Since 1974, Brokers not Banks originate almost all mortgage loans keeping the cost down for the consumers, the big banks would like to recover the market they lost.

Bill

Aug 29, 2007 06:19 AM
Sean Allen
International Financing Solutions - Fort Myers, FL
International Financing Solutions

Ggod post. I often explain to my clients how I/we get paid so that they are aware and can make a better decision about their interest rate. I believe it is only fair.

Sean Allen
The Mortgage Professionals
Professional Credit Consulting & Repair
www.TheMortgageProfessionals.biz

Aug 29, 2007 09:01 AM
Brady Pevehouse
RE/MAX Downtown - Orlando, FL
Your Orlando Real Estate Professional

I like and appreciate Bills response!

It is a feable attempt by lenders to make them appear cheaper or more legit than a mortgage broker. Which is not simply true......... yes I said that right.

If banks were to disclose ysp.... and it was in the publics benefit then shouldn't banks be offering loans at 2 to 3% less than brokers?

Aug 29, 2007 10:52 AM
Lanre-"THE REAL ESTATE FARMER" Folayan
Keller Williams Select Realtors-Buy a home in Washington DC. Sell a home in Washington DC - Bowie, MD
I don't make promises.I deliver results.SOLD HOMES
Great post Brian. And I appreciate Bill's comment. Reading his post alone I definitely learned something. Bill you need to write more blogs as well since you have so much knowledge and experience in the real estate/mortgage industry.
Aug 29, 2007 02:21 PM
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes
Good post. Good information. Thanks for sharing with us all.
Aug 29, 2007 06:03 PM
Duane Hosek
Coldwell Banker - Lewis-Kirkeby-Hall - Rapid City, SD

Good perspective Brian.............You opened my eyes looking at this at a different angle.

Duane Hosek in the Black Hills of South Dakota

Aug 29, 2007 06:42 PM
Brian Piper
Jacob Dean Mortgage - Vienna, VA
BestVirginiaHomeLoans.com

Just a clarification of YSP from broker perspective. As a correspondent lender (meaning I could close a loan directly in the lender's name) a broker could receive compensation for selling a comparatively higher rate. Although a bank doesn't pay itself to sell a higher rate (Bill's point above and the true definition of YSP), the same principle applies. The "us" vs "them" of who should disclose should not overshadow the concept of "should it be disclosed?". Again, if an auto dealer marks up an interest rate and receives compensation from the lender for that mark up, should it also be disclosed? Or, if this premium was eliminated, would it serve the customers best interest?

Without debating merits of any of these arguments, I completely support a good faith estimate that is more "good faith" and less "estimate", and if you aren't getting the straight scoop from the MANDATORY disclosures, what else are you not getting from your loan officer?

Sep 04, 2007 05:34 AM