The purpose of this information is to provide information to consumers to better understand the mortgage industry. Many people do not understand the inner workings of how this industry works. Understanding this is crucial in making the largest transaction that most people make in their lifetime.
Global Bancorp Inc. is helping consumers understand how mortgage bankers and brokers work and make money. This will in turn help consumers make informed decisions about their mortgages. The information here will discuss the Six Mortgage Myths that are prevalent today. This information will hopefully educate the consumer and help in making more informed decisions.
- The “No Cost” Loan
- Getting a Rate Quote
- The Lowest Rate is the Best Deal
- Bankers are Better than Brokers
- Pre-Qualifications and Pre-Approvals have Value
- Getting a Good Faith Estimate without Information
The fact is that there is no such thing as a “No Cost” Loan. There are really only two kinds of mortgage loans available for consumers. There is the “Disclose the Costs to the Consumer” Loan and the “Hide the Costs from the Consumer” Loan. Even if the Mortgage lender was willing to work for free (which, like you, they are not willing to work for free) there are a number of “hard costs” which occur on each and every mortgage loan written. These include Title Search and Insurance, Attorney's fees, County Recording fees, and Underwriting to name a few. These fees have to be paid by someone and ultimately it is you. For a lender to accomplish the illusion of a No-Cost loan they have to give you what's called “above par” pricing. If the mortgage lender provides a loan where the rate is above par they receive a premium, called “Yield Spread Premium”. In a “No-Cost” loan the mortgage lender uses the Yield Spread Premium to cover the hard costs of the loan as well as their profit. So you end up paying a higher rate and in the long run, it costs you much more money over the life of the loan.
People call lenders all the time and ask “What's your best rate?” Asking for a rate without giving any information is a bad idea. Why? Because frankly, anyone can give you any rate quote they want over the phone because there is no way you can hold them to that rate!! What they don't educate you about is that every mortgage lending decision in America is based on what they call the Three C's: Credit, Collateral, and Capability to pay. Credit is your credit score; Collateral is your Loan-to-Value Ratio; and Capability is your Debt-to-Income Ratio. Without having this information there isn't a professional, responsible mortgage lender anywhere who could give you an accurate quote.
The interest rate is one of many components in an equation, but it does not determine the quality of your financial picture. For example, an ARM or Adjustable Rate Mortgage has the lowest rate of any product on the market. However, ARM mortgage rates can adjust up or down . During a period of rising interest rates, the consumer can suddenly find themselves in the position of no longer being able to afford their mortgage payment because the rise in interest rates has pushed their payment beyond what they can afford. Every person's financial position is different and should be analyzed every time they consider doing a mortgage. There are literally thousands of loan programs available for consumers today and each one has a different impact on their bottom line.
Also, often times consumers who have a fairly good rate on their mortgage (which is a tax benefit) but they have thousands of dollars in credit card or other debt (that is not a tax benefit). People do not pay their bills with interest rates, they have to pay with cash. When considering your mortgage options you should consider the option that has the biggest impact on your cash flow and how long you have to pay for your home before you own it.
One of the biggest issues we see today is the 1.9% interest rate. This sounds too good to be true. Guess what? It is. The 1.9% rate is a one-month ARM. The rate will then soar to a much higher rate after the one month. This product is used to entice consumers into calling the lender.
We know a processor who had worked for a large, well known, retail bank for a number of years. If she could not get a loan approved with the limited number of loan products her bank sold all she could do was apologize to the borrower and send a rejection letter. A Banker can only lend their money. A broker has many more options for their client to consider. Besides, most large banks (Washington Mutual, Bank of America, etc) have wholesale divisions that do business with mortgage brokers. The way these banks expand their markets is they offer brokers the same money they offer to you when you walk in as a retail customer. But they give it to a broker at a wholesale rate, which is cheaper than you can get it directly.
People will call mortgage lenders all the time and ask “I have already been pre-qualified for a loan of X dollars. I am just checking on rates.” Or even better, “We were looking at house over the weekend and the real estate agent pre-qualified us for a loan of X dollars.” We know that there are exceptions to this rule, but most real estate agents do not know anything about mortgage finance or about getting a client a mortgage loan. Just like mortgage lenders don't know anything about selling homes. The point is this, a pre-qualification (or pre-approval) is worthless. Anybody can give you a pre-qualification. It does not mean anything; it has no value for you.
Why is this? Because a pre-qualification, means that somebody took the word of a potential borrower regarding their income, debt and credit standing and then said “Based on what you are telling me you fit in the parameters of some possible loan program.” You could call five different lenders and get five different pre-qualification amounts. The problem is trying to get any of those companies to honor their pre-qualification. Since none of the information has been actually analyzed or verified, there is no way to force a lender to honor their pre-qualification.
Don't waste your time with a pre-qualification. In today's marketplace, every client can be approved for their loan before they look for a house or contemplate a refinance. Fannie Mae, Freddie Mac, FHA, as well as many Non-Conforming lenders have automated on-line underwriting systems. What this means in our office is that you should only get an “Approval” not a “Pre-approval” or “Pre-qualification”.
Think about the advantage when you are home shopping. Your Real Estate agent had submitted a contract offer for you on the home of your dreams, but so have 2 other potential buyers. If the other bids are equal, which one does the home seller take? Does the seller take the offer with a guaranteed closing or the one that has to wait for a loan approval? Which one?
People call lenders everyday and ask: “Give me your best rate on a 30 year fixed and send me a Good Faith Estimate” A good mortgage lender should politely decline.
Why?
First of all, simply because they haven't done their homework and it is unethical to entice somebody with something they may…. or may not qualify for. A Good Faith Estimate without a complete application and financial analysis is a lot like a “Pre-Qualification”. It's worthless!
Why is it so hard to give an accurate estimate of costs?
The reality is … it's not. If you know exactly what kind of loan program the client is approved for and how the deal is to be structured, accurate closing costs can be determined. For example, the costs of a $100,000 loan are different for an FHA 30 year fixed vs. a Conventional 30 year fixed vs. a Non-Conforming 30 year fixed. If that $100,000 loan is at 80% Loan-To-Value, the costs are different than if it is a 100% Loan-To- Value. Purchase, rate and term refinance, cash out refinance, with or without escrows, full income documentation, stated income, or no income verification, borrower's credit are just some of the factors that affect the cost of a loan. In addition, things like attorney's fees, which County the property is located in, what day of the month you are closing, appraisal cost, homeowners association dues, and the cost of the homeowners insurance policy and more are all things that also affect the cost of a loan.
Ultimately, what you want to know is
What are the details of the loan program? How much cash out of your pocket do you need to close? How does it compare with other products? If you want a solid, truthful, professional answer, be prepared to give some detailed information.
The good companies will not be so desperate for your business that they have to misquote you. A good company does not need to “Bait and Switch” you on costs so they can get you to a closing table where all of a sudden your deal has miraculously changed.
The more informed you are as a consumer, the more likely you will be to get the fairest deal possible. The best thing to do is look at your overall financial picture and choose the option that is best for you. So don't be fooled by low teaser rates or “No Cost” loans. Make sure you see the entire picture and understand the meaning of everything. If you don't understand something, ask a question. If you get an uncomfortable feeling with the answer, you may want to find another lender. Hopefully, this information will help you in making an informed decision about one of the largest transaction you make.
