Here is a Sample Chapter from our book "Good Credit is Sexy".

Chapter 16 - Mortgage Costs

Don and Ann's story

Don and Ann are purchasing their first home together, after Don's company offered to help with the closing costs involved with his relocation. As their credit was slightly rocky, Don and Ann decided to go through a local mortgage broker in their new city. Although expecting to have to settle for less than an "A" loan, they were pleasantly surprised when their loan officer, Jordan, told them she had a special program for them which would allow them to qualify at the interest rate they know to be the national average for "A" loans. Since Ann had another month to go on her apartment, they immediately instructed Jordan to lock down their interest rate, guaranteeing that this would be the interest rate on the loan when they closed approximately a month and a half later.

Sure enough, after sending in the loan paperwork, they received a TIL (Truth In Lending) notice confirming the interest rate and fees that Jordan had promised them. Right around the time Ann's lease was expiring, she received a call from Jordan, telling them that their loan was ready to close, and telling them the amount of the cashier's check they needed to bring to cover closing costs and the down payment. Excitedly, Don and Ann packed all of their belongings into a huge rental van and drove to their new city a week later.

Sitting at the title company to sign paperwork on their new home, Don and Ann discovered that while the interest rate was fine, the fees were $3000 more than they had been told, and the extra fees were cutting into their down payment. The sympathetic title agent wearily placed a call to Jordan, who then spoke to her clients. She explained that they had been turned down for the loan with the interest rate they wanted and she had had to switch loan programs in order to qualify them. The extra $3000 was to buy down the interest rate to the rate they had wanted. If they didn't want the loan, she continued, they could try someplace else, but this was the best they could get. Ann, tears in her eyes, asked the title agent what she could do, and was wearily told it was up to them to decide if they wanted the loan , and consequently, the house. Don, realizing all of his and Ann's worldly possessions were parked outside and they had no where else to go, swallowed hard and convinced Ann they should sign.

Real Costs of a Loan through a Mortgage Broker

Ok, you've chosen your loan officer, and you've been approved for a loan. Now you need to know how to negotiate the costs of getting one. We'll give you an idea of how the mortgage broker makes his/her money from a deal. Pay close attention and you will see that there are many ways to skim off the top of a deal. The following are the Real Costs (costs that every loan has and on which the broker makes no money):

• Appraisal
• Title Fees: Title insurance, recording fees, and title paperwork preparation
• A Processing Fee (cost of hiring employees to process the loan)
• Mortgage Insurance (for loans over 80% of the property's worth)
• Pre-paid Interest
• Credit Report Fees
• Inspection Fees (generally termite inspection)

How a Loan Officer Makes Money

Most loan officers are not paid a salary, they get commissions off of every loan they originate which closes. To originate a loan, the loan officer merely gets a client to fill out a loan application. A good loan officer should also:

• collect all of the documentation the bank will need to approve the
• loan and fees for the credit report
• take the time to explain everything you need to know
• be available to take your phone calls should you have questions
• report to you once a week via the phone on the status of your loan (even if there is no real status)
• Be creative about finding solutions to any problems that may arise

If they do all of this, they deserve their commissions. However, even if they don't do all of these things, they will get paid.

A loan officer typically splits all of the profits for each loan with the company in which they work, mostly 50-50. Therefore, every dollar he can squeeze out of you is 50 cents in his pocket.

The "normal fees" in the industry are an origination fee (1 point) plus one additional point. What's a point? A point is 1% of the total loan amount. For example, one point on a loan amount of $50,000 is $500 dollars. Some brokers have limitation on how much a loan officer can charge in fees - the loan application fee, the origination fee and the points. However, most mortgage broker companies split the profit earned from every loan with the loan officer. Can you see how it is in the interest of a loan officer to charge you more points and fees?

You heard of those no-cost refinance loans? Forget it. There is no such thing. A broker must make money on every loan. Many well-intentioned loan officer honestly believes they are giving you a loan for free, but this is simply not the case. They finance the costs of the loans by raising the interest rate on the loan they sell you and receive a commission for selling you this higher interest rate loan. This commission is enough to pay for the costs of the loan PLUS pay them a commission. The commission is called in the industry "getting points on the back". And you are financing the "free cost" of this loan over 30 years, which can double or triple the costs as compared to if you had paid in cash.

This is the way it works. Each day, loan officers receive rates from banks for each of their loan programs. Listed for each program is the par interest rate. The par interest rate is the interest rate at which the broker does not have to pay a fee in order to "buy" the loan and then sell it to you, nor does he receive a commission for selling you the loan at this rate. You might say that the par rate is "loan equilibrium". Table 1 shows an example of the types of rates a bank might publish to their subscribing mortgage companies every day.

Table 1 - Example Rate Sheet

In the above Example Rate sheet, the "par" value for a 15 day lock is 7.0%. The numbers in parentheses are the points returned to the loan proceeds as a commission for purchasing a higher interest rate loan. Why would anyone do this? The answer: to get a "free" loan.

Example - points on the back.
If you wanted a $150,000 loan, but didn't have enough to cover the loan costs, you could bump up your interest rate to 7.5 percent, giving you:

This money will be credited to the loan proceeds at closing? What does this mean? It means that if your closing costs are $2250, you won't have to lay out a dime to do the loan. (Keep in mind, though, that if you are purchasing a home, you can't just up the interest rate to get your down payment. You must have enough money for the down.)

And if you didn't know that the rate you were getting is higher than the par rate (meaning you paid full loan costs)? The loan officer gets that $2250.

In Table one, you may have noticed the 15, 30, 45 and 60 day lock rates. Market interest rates fluctuate not just every day but every hour. The rate sheets are only good at the moment they are issued. To alleviate confusion, and to allow brokers to offer a rate which will be held steady for a certain period of time. To do this, the broker can tell the mortgage company that he wants them to hold a loan at a certain interest rate for a certain period of time. This is called locking a loan. You may have noticed that the longer the lock, the more expensive (points-wise), the loan. This is because the bank is taking a gamble that the rates will remain steady for the period the broker wants. If the market rates shoot up, the bank will still have to honor the locked rate at the lower interest rate. More about this a little later on.

The reverse situation to getting points on the backside is paying extra points for a lower interest rate. This is called buying down the interest rate. You will pay higher costs up-front at closing and less over the life of the loan due to a lower interest rate.

What if you suspect that your loan officer jacked up your interest rate to get more commission (he received points on the back) and didn't tell you about it? It does happen.

It is the loan officer who picks which interest he is going to sell you, and consequently the commissions he will earn on this loan. If he is competing with another loan company to get your loan, he may not be greedy and not jack up the rate. But if you don't shop around, don't trust him to be honest. Some loan officers are completely upfront with you, but some aren't.

Ask him or her. If you're not satisfied with the answer you can always figure out how much "extra" money the broker received by looking at your closing statement from the title company. Your title officer will gladly point it out. However, at this stage of the game, you're usually signing loan documents and it's too late to do anything about it short of cancelling the deal. (That's why it is important to try to review your Uniform Settlement Statement ahead of time.) If you notice your mortgage company is getting three points on the back (meaning the interest rate you're getting is much higher than the par rate) you can always walk out on the deal. Some loan officers count on the fact that the moving van containing all your worldly possessions is parked outside and you won't do that.

Fees to watch out for

Keep in mind, some brokers won't let their loan officers charge less than one point origination plus one point (known in the industry as one and one). But some do. ALWAYS shop around, especially if you have A credit. Some loan officers will charge you less if they know your loan will be a piece of cake to put through the system.

Application fees are non-refundable and they are 100% pure profit for the mortgage broker. Walk out if they ask for an application fee up front.

The only exception to this rule: if you have tough credit. In this case, the loan officer will have to do a lot of work before they can tell if your loan will go through. Time is money and they want to be paid for this effort. If your loan gets denied without an application fee up front, the loan officer put in a lot of hours for nothing.