Recently I was having a conversation with a realtor I met named Todd. That’s what loan originators do, we meet with realtors and try to build a network for referrals. This means that realtors are often beset by lenders and Todd is no different. He was quick to his point when he asked: “What are your fees?”.
The following conversation ensued.
Me: “What are our fees?”
Todd: “Yes, your lender fees. What are they?”
Me: “Well the fees depend on a number of different factors.”
Todd: “Yes, but your fees, what fees do you add?”
Me: “That depends on which wholesale lender we’re working with, they all have different fees. Generally, it’s around $950 for underwriting, $470 for an appraisal, and $29 to pull credit. Title and escrow fees would depend on those agencies.”
Todd: “So $950. The lender I work with changes $500 or less in fees. I’ve talked to some lenders who charge as much as $1,500 in fees.”
Todd: “Yes, so you see I’m very happy with my lender. Thank you.”
I thanked Todd for his time and we wrapped up our conversation.
From one point of view, I can understand Todd’s point. If a person is presented with three options: paying $500, $950 or $1,500 the decision seems pretty simple.
$500 wins every time.
But from another point of view, Todd is being a little short-sighted and might not be doing his customers any favors. That’s because fees do not exist in isolation. In this instance to truly understand whether the financial institution with the $500 fee has the best deal the borrower would need to look at the entire loan estimate and ask a few questions.
- What rate am I getting?
- What are the costs or credits associated with that rate?
- How much is mortgage insurance?
- What is the total monthly payment?
It’s important to understand that financial institutions can arrange or structure their rates and fees in any number of ways. This means they can charge less in one area but they make it up by charging more in another. The financial institution with the $500 fee might have the lowest fee but are they offering the best rate? And what are the costs or credits associated with that rate?
Most people are familiar with the concept of buying down their rate. It’s pretty basic. The financial institution funding your loan will allow you to pay a “point” upfront, usually 1% of the loan amount, to lower your interest rate by approximately 1/4th of a percent*.
What many people are not aware of, is that the financial institution funding your loan will also pay you a credit to take a higher rate. They are essentially buying up the rate.
Have you seen a rate sheet? A rate sheet is a list of all the various loan programs, terms, rates, etc… For every available rate, there will either be a cost to the borrower or a credit to the borrower. If you are working with a Loan Officer they will typically start with the par rate. That’s the rate where you, the borrower, and the financial institution funding your loan are as close to even as possible.
Back to the financial institution with the $500 fee. That seems like a pretty good deal compared to $950 or $1,500. That deal becomes less sweet, however, if that financial institution is offering a rate that is 1/8% higher than other financial institutions or if they are charging you more to get an equivalent rate.
Here’s a comparison as an example. Which is the better value?
|Bank A||Bank B||Bank C|
|Cost or (Credit)||$500||($500)||($750)|
Bank A has the lowest fee but they are charging the borrower $500 ($1000 total lender fee). Bank C has the highest fee but they are giving the borrower a $750 credit ($750 total lender fee). Bank B is the best value, they are charging a $950 fee but crediting the borrower $500 ($450 total lender fee).
This is the type of comparison shopping buyers need to do and realtors need to be aware of. Do not get caught in the trap of focusing too narrowly on an individual variable like a fee or the rate. Look at the complete package, compare all the different variables to get a clear picture of what you’re going to be paying. Then you can make the best decision about what is right for you.
*Everyone wants the lowest rate possible but it isn’t always a good idea to buy down the rate. The upfront cost to the buyer/borrower can take years to recoup so it’s only a good idea to buy down the rate if you know you are going to be in the home long enough to justify the buy down.
For more information contact Aaron Walker or Jay Rapson at Aaron Lending, LLC.
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