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
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