Let’s Get Statred
Yesterday I wanted to point out how there is so much misinformation that it is easy to get lost. Unfortunately there are not a GPS for financial direction. The single biggest issue his that 95% of the people that seek financial advise get it from their family or friends. Which in most cases these people know little to nothing in regards to mortgages. I do this everyday and it is difficult to keep up with the ever changing mortgage industry. So anyone that has been out of the business just six months realty is in no position to offer sound advise because of the constant change. The Media is certainly no help. If you really think about it there are not many parent companies of our Media outlets that are not tied to a mortgage company in some way. So clear your mind and let’s get started.
One of the biggest things today when looking for a new mortgage is what is a good deal. Well define good deal, I am going to define a good deal as a fair deal on all sides. The borrower gets the best rate possible at a fair cost and the bank or broker is paid a fair compensation. This is not as easy as it sounds as due to all of the creative loan offers in the past such as No Cost Loans, Free Closers, No Income Documentation Required, ect. These past programs are still in our heads and we get lost thinking about the mortgage we got a few years ago. Well stop it, we have just gone through one of the biggest financial meltdowns in history so all bets are off. No one works for free and in most cases these no cost loan programs will cost the borrower as much as ten times more than just simply paying the fees up front. If a deal sounds to good to be true then it is!
So how can a free or no fee loan cost more? Well it is like this, what you did not know is prior to 2010 there was backside money paid to the loan originator from the lender for a delivered loan at a specific rate. The higher the rate the more money paid to the originator, bank or broker. So if your loan is structured at a high enough interest rate there will be enough money paid to the originator to cover all of the third party fees and themselves. So here is where it cost you more. You are in most cases paying roughly ½% more on your loan rate than someone that paid their fees up front. So depending upon your loan amount this can be a considerable amount in your monthly payment. Now multiple this additional monthly payment money by a year and then by the full term. The total amount of additional money can be alarming once totaled up. Most of these loans came with a prepayment penalty as well to insure that the lender makes their money back in the event that you sold your property or refinanced shortly after doing your new loan. This way they can not loose on their investment in you the borrower.
Now as of January 1st, 21010 we now have a new set of loan disclosures that we are required to use in order to submit a loan to underwriting. The intent of the new Good Faith Estimate and Initial Fees Sheet is not bad but there are several major flaws in them that make them even more difficult to understand. First of all the borrower is not required to sign either document so this is a huge red flag for loan fraud. Second is that the there are different rules for a banker and a broker. So what does that mean to the borrower? A broker is now required to show a break down of all of the fees from the broker’s own compensation to the termite report on the Initial Fees Sheet. So how can this be a bad thing? The problem comes in when you try to list these fees on the new Good Faith Estimate. There are not enough lines to show the itemized breakdown so the fees are combined. So page two, box one will look like a huge figure and is misleading – there is a huge benefit that I will cover later. So I would recommend that you use the Initial Fees Sheet for your side by side comparison.
So let’s look at a bank’s from the borrower’s viewpoint. Way is it a bank seems to not have as many fees listed like my broker? Well the answer is this, the Fed’s gave the banks a different set of rules to play by. So what that means is a banker is not required to list all of their fees on the Good Faith Estimate the same way that a Broker is required to. This can make the loan process even more confusing for the borrower. Your bank loan officer will most likely direct you to the A.P.R. in an attempt to make their deal look better than the other guys deal. So this is where common sense comes in. What is the loan costing me and what is my monthly payment and interest rate.
So let’s use our common sense. Banks have much higher overhead than a broker and you will be charged accordingly, this is a simple fact of doing business to cover your overhead. Bank loan officers are not required to be licensed and a broker or broker loan officers are required by law to be licensed, or at least in CA. So use your common sense and think about this. The right deal should present itself. Yes there are always exceptions such as you are only going to live in a property for only a year or two. In this scenario a no fee loan would be in your best interest.
So here is a huge game changer, in typical government fashion the right hand does not know what the left hand is doing. A bank will try to hide your fees and a broker is required to show the fees as we spoke about earlier. The way the GFE works as of 2010 it totals up the broker fee and several other third party fees and lists them as origination. This combined figure is not going to the broker but a bank loan officer would have you believe that it is. Well it is not! Not only is it by design to help the banks, remember the Feds have an interest in the banks, it hurts the IRS or the other hand. The reason is because the current IRS tax law states that you can write off your loan origination fees. The old disclosures did not total the fees in the current fashion. The new GFE totals the fees in a lump amount which by law allows you to write off the totaled amount. So a broker GFE allows you the ability to write off more than a bank GFE because the banks loan officers hide the fees. Every loan has these fees and banks choice no to show them which does not allow you this writeoff. It is that simple. If I was going to get a loan for myself I would request all of the fees to show. Even if I was getting a free closer loan so that I got the benefit from the tax write off. Of course I would recommend that you consult your tax professional to get the exact benefit to your specific scenario.
Tomorrow I will break down A.P.R. fees and how this figure is complied.