When shopping around for a lender you will no doubt be inundated with offers for loans with no closing costs. At first blush, that sounds great doesn’t it? What about these no closing cost loans? With those two choices available, why would anyone want to do a loan with Wells Fargo or Bank of America; they don’t offer no cost loans?
In the Business of Making Money
Lenders are not in the business of giving things away goods or services for free. There is always a cost associated with borrowing money, even if you don’t see one. There are companies that offer zero closing costs and they have all kinds of ways to hide their expenses. Some Loan Officers will lowball escrow fees. They may claim on the GFE (good faith estimate) that the title company they use only charges a few hundred dollars when they know you will be charged two thousand. The biggest fee you will be charged is title insurance which is usually a percentage of the loan amount. You won’t find out until the day you go to sign papers.
Annual Percentage Rate
If your loan officer is telling you 4.25 percent but your APR or annual percentage rate happens to be 4.75 percent what does that mean and what rate am I really getting. The difference between the two rates is a half of a percent. What that means is somewhere in the loan your loan officer has tagged in another half percent. The extra fees could be anywhere. A common place would be escrow costs; specifically the title insurance fee. If your broker is talking no cost loans and you see a difference between the interest rate and the APR, then it’s a not a no cost loan. You’re being charged a half percent.
Since you’re not privy to a lender’s rate sheet you have no way of knowing what rate they can actually do your loan at. You may be offered a loan of 4.0 percent with a half a point, but the lender can actually afford to do the loan at 3.85 with a quarter point. They of course pocket the rest. Loan officers and brokers used to be able to sell overages and they we allowed to keep the amount over that they sold the loan. In other words, if your lender could do the loan at 4 percent with one point, and your loan officer sold you the loan a 5 percent, he got to keep the extra percent. That used to be the case with Wells Fargo and they abandoned the practice soon after I began working for them. We thought it was real drag because on a half million dollar loan that was an extra five grand in our pockets. Since just about every loan officer gets paid on commissions only those overages were a huge part of our paychecks. Many banks pay a flat commission on a tiered payout structure. The more loans they close per month the more they get paid. If you can find a loan officer that gets paid that way, it’s to your benefit. Those loan officers have no vested interest in how many points you pay or what interest rate you get. In fact, they will strive to get the lowest rate and lowest points just to get the loan done. If they could give you a fixed rate at 2 percent with no points they’d do it. You can rest assured that they are giving you the best deal they can because they don’t want you going to another lender.
Don’t Hesitate to Ask
When you begin talking to a loan officer or mortgage broker don’t hesitate to ask how they are compensated. Watch out for brokers who don’t give you a straight answer.
“It’s complicated,” many say.
Don’t let them off the hook. It won’t be so complicated that you won’t be able to understand. If their payout is in any way based on the rate or points you pay, you might want to look elsewhere. My next question would be about what rate I could get. If the guy whose pay depends on your rate or points can get you a rate much lower than anyone, you might want to consider working with him anyway. If one broker offers you a 5 percent fixed with no points, but the other guy who gets paid from points can offer you a 4 percent fixed with 2 points do the math. The lower rate will more than compensate you for the points you had to pay. In other words, if some guy offered to give me 5 bucks free, I’d take it. But if another guy offered me 10 bucks if I would give him 3 dollars, which deal do you think I’d take?
The more you know about the loan process the harder it will be for an unscrupulous broker to take advantage of you. Learn how loan officers and brokers hide fees so they can’t hide any from you. Funding a loan is not just a one sided deal. Both you and your broker are in it together. The more you know, the better you will be able to help the loan process be a smooth one.
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