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"Direct Lenders" vs. Mortgage Brokers
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The type of loan you choose will influence the "up front" fees and monthly payments of your loan.
“Despite all the sales hype you’ve heard...there is no (essential) difference between a so called “direct lender" (banks) and a mortgage broker.
If your lender is NOT a federally insured bank (FDIC)…then they are a "broker."
Companies such as Di-Tech and GMAC are simply selling (with their big advertising budgets) consumers a "bill of goods."
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Here’s the facts:
All mortgage loans are “packaged” and “sold off” to “Wall Street” investment firms.
These “Wall Street” investment firms:
1) Either hold the debt...collecting the monthly payments...OR sell the loans to Fannie Mae and Freddie Mac (quasi Gov’t institutions).
(No lending institution keeps their portfolio of mortgage loans for more than 1 year).
It is the Wall Street analysts…that determine what they are willing to pay the bank for these packages of loans.
The analyst’s pricing is "risk based." This means that mortgage packages are rated from “A” paper quality (comprised of borrowers who had perfect credit [720 fico and above] with significant down payments) to near “junk bond status” (often comprised by borrowers who had "zero" down and marginal credit score [less than 660 fico] which then have the highest rate of foreclosures).
Therefore, all rates are similarly priced at the wholesale level in accordance with the perceived risk.
What determines the “retail” rate...being offered the consumer…is the bank's
“overhead” and their stock price/dividend payments by their board of directors.
If a bank is top heavy in management, or has “over invested” (i.e. schemed) in the risky loans AND HAS A TRACK RECORD OF DECEIVING THE ANALYSTS, their loans have less value than other banks' portfolios.
(The reader is certainly aware of recent news articles that outline the demise Countrywide and Washington Mutual due to their deceptive lending practices, bogus appraisals, and “fee” gouging” of borrowers.)
Brokers on the other hand “shop” loans to many different banks and directly to representatives of Wall Street.
(Brokers do not actually “fund” their loans or “draw” their own loan documents.)
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Advantages versus Disadvantages
a) If a borrower is “turned down” by a bank…they must start the application process all over again with another lending institution or broker.
This delays the closing of escrow or can actually cause the sale to collapse, putting the buyers “earnest money deposit” (usually 2% of the sales price) at risk.
(Most purchase contracts between buyers and sellers have a provision that penalizes both for “non performance.”)
Sellers are often reluctant to release monies (deposited in escrow by the buyer) if at all at the close of escrow if the buyers can not qualify.
At best the buyer will have to retain an attorney ($$$) to get a portion of their deposit returned.
b) Banks do not have to release a copy of the borrowers credit report and/or their appraisal…at the close of escrow (despite the fact that the borrower has paid for it).
In fact most refuse to comply with the consumers request for copies of both.
c) Banks have control over their employees. Often this can lessen a borrower’s aggravation when it comes to the minutia of (last minute) financial documentation for the loan.
d) Banks rely on large advertising budgets to procure borrowers. Despite the “lip service” to the contrary, borrowers are simply a "number" and a means to accomplish sales goals.
e) Bank employees are just that - EMPLOYEES - subject to the whims of THEIR SALES MANAGER. Hence borrowers rarely receive "independent/unbiased" financial advice or planning; and, borrowers are most likely steered to the loan program that is most profitable for the bank.
Pending criminal investigations by the FBI and many lending industry studies are showing this phenomenon has been directly responsible for the sub prime lending crisis.
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g) Banks employees are subject to back ground checks and drug testing. Brokers and their sales associates are rarely subject to either.
h) Brokers and their sales associates are required BY LAW to be licensed. Bank employees are not required to be licensed...(often leading banks to hire young “fresh faces” that are paid less and are less experienced in the lending process).
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Types of Loans
Loans will have either a “fixed” interest rate or a “variable” interest rate.
Fixed rate loans have constant “principal and interest” payments during the loan term.
Variable rate loans can have any one of a number of "indexes" and "margins" which determine how and when the rate and payment amount will change.
If you apply for a variable rate loan, also known as an adjustable rate mortgage ("ARM"), a disclosure booklet (required by the Truth in Lending Act) will further describe the ARM.
The payments change depending on changes in the “market conditions” that are driven by the fears of inflation.
The falling dollar, the rising price of oil and massive government deficits have fueled inflation. This has caused many adjustable rates, and, therefore, home owner payments, to sky rocket. This is forcing the Federal Reserve bank to consider raising rates.
Some loans have short terms and a large final payment called a "balloon."
THESE LOANS TYPES ARE AT THE CENTER OF THE CURRENT LENDING CRISIS AND SHOULD BE AVOIDED AT ALL COSTS.
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Interest Rate, "Points" & Other Fees
Often the price of a home mortgage loan is stated in terms of an interest rate, points, and other fees.
A "point" is a fee that equals 1 percent of the loan amount. Points are usually paid to the lender, mortgage broker, or both, upon the completion of the escrow.
You will have the choice to pay fewer points in exchange for a higher interest rate or more points for a lower rate.
A document called the Truth in Lending Disclosure Statement will show you the "Annual Percentage Rate" ("APR") and other payment information for the loan you have applied for.
The APR takes into account not only the interest rate, but also the points, mortgage broker fees and certain other fees that you have to pay.
The APR is a total of all 360 payments (projected over the 30 years) PLUS THE LENDER FEES OUTLINED IN THE GOOD FAITH ESTIMATE..the total is then divided by 360 PAYMENTS to get the (total) APR.
Demand the APR DISCLOSURE….. before you apply TO ANY BROKER OR BANK to help you shop for the loan that is best for you.
Check the APR disclosure…. to determine if your loan has a "prepayment penalty” if you sell or refinance loan within the next 3 years.
Banks and brokers often entice borrowers with a (slightly) lower interest rate in order to slip in pre-payment penalty that can in result in $10,000 penalty should the borrower need to sell their home.
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Lender-Required Settlement Costs
Whether you are refinancing a current loan or purchasing a new home, you will be required to pay for certain settlement services, such as a (new) appraisal, an escrow provider and title insurance.
Other services include credit report, loan processing, document preparation, underwriting, flood certification or an application fee.
Always to ask for an estimate of fees & settlement costs before choosing a lender.
Some banks offer "no cost" or "no point" loans but cover these fees or costs by charging a higher interest rate.
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Comparing APRs may be an effective way to shop for a loan. However, you must compare similar loan products for the same loan amount.
For example, compare two 30-year fixed rate loans for $100,000.
Loan A with an APR of 8.35% is less costly than Loan B with an APR of 8.65% over the loan term.
However, before you decide on a loan, you should consider the up-front cash you will be required to pay for each of the two loans as well.
An effective shopping technique is to compare identical loans with different up-front points and other fees.
For example, if you are offered two…30-year fixed rate loans…for $100,000 at an 8% interest rate, the monthly payments will be the same, but the up-front costs are different.
Loan A - 2 points ($2,000) and lender required costs of $1800 = $3800 in costs.
Loan B - 2 1/4 points ($2250) and lender required costs of $1200 = $3450 in costs.
A comparison of the up-front costs shows Loan B requires $350 less in up-front cash than Loan A.
Your individual situation (how long you plan to reside in the house) and your tax situation may affect your choice of loans (points can usually be deducted for the tax year that you purchased a house).
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“Lock-in” periods
"Locking-in" your rate or points at the time of application or during the processing of your loan will keep the rate and/or points from changing until settlement or closing of the escrow process.
Ask your lender if there is a fee to lock-in the rate and whether the fee reduces the amount you have to pay for points.
Find out how long the lock-in is good, what happens if it expires, and whether the lock-in fee is refundable if your application is rejected?
Note: The longer your rate lock…the higher your interest rate and or points (fees).
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Private mortgage insurance (PMI) and government mortgage insurance protects the lender against the borrowers default.
Investor analysts often require mortgage insurance for loans where the down payment is less than 20% of the sales price.
Ask your lender if mortgage insurance is required and how much it will cost.
Mortgage insurance should not be confused with mortgage life, credit life or disability insurance, which are touted” (i.e sold) to homeowners as a protection for paying off a mortgage (in the event of the borrower's death or disability).
According to consumer advocacy groups, rate policies as virtually worthless due to the escape clauses that are built in to the "fine print."
It may be possible to cancel private mortgage insurance at some point, when your loan balance is reduced to a certain amount OR you’re home has appreciated approx. 20%.
Consumers should note that even though the law is clear on this formula for cancelling PMI, lenders will drag the “bureaucratic feet” and place road blocks in an effort to frustrate the homeowner efforts.
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These tactics include but are not limited to:
a) Giving the borrower in-accurate information or simply refusing to provide any information for the “cancellation” process.
b) Refusing to accept an independent appraiser’s evaluation of the homes evaluation.
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Lock-ins
"Locking-in" your rate or points at the time of application or during the processing of your loan will keep the rate and/or points from changing until settlement or closing of the escrow process.
Ask your lender if there is a fee to lock-in the rate and whether the fee reduces the amount you have to pay for points.
Find out how long the lock-in is valid, and what happens if it expires?
BUYERS SHOULD NEVER PAY AN “UP FRONT FEE” TO LOCK & INTEREST RATE.
IT SIMPLY PROVIDES TOO MUCH TEMPTATION FOR THE LENDER TO DELAY THE FUNDING OF THE LOAN AND COLLECT THE DEPOSIT.
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Tax and Insurance Payments
Your monthly mortgage payment will be used to repay the money you borrowed ….plus the interest.
To determine the amount of repayment (reduction) of the “principal” versus the interest paid to the lender..consult an “amortization schedule” that can be provided before application.
Part of your monthly payment may be deposited into an "escrow account" (aka a "reserve" or "impound" account) that your lender or servicer uses to pay your real estate taxes, property insurance, mortgage insurance and/or flood insurance.
Ask your lender or mortgage broker if you will be required to set up an escrow or impound account for taxes and insurance.
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