|Are You Watching a Shell Game?|
by David Reed
Have you gotten an interest rate quote from a lender or mortgage broker lately? Have you requested a Good Faith Estimate of Settlement Charges to help you compare offerings from the multitude or mortgage mavens? Do you feel like you’re watching a shell game?
I have to admit. The lending industry has done a fairly good job of muddying up the process when it comes to quoting interest rates. Why is that? Why can’t’ you just call up someone and ask them their current rate and get a straight answer? Why is that everything is just so darned confusing sometimes? All you want is a rate, right?
The fact is that there is nothing to distinguish a 30 year fixed rate mortgage. It is what it is. So how can one lender differentiate themselves among the thousands or so possible home loan companies? It’s difficult to do, but that’s the challenge lenders sometimes face when trying to issue residential mortgages. After all, a fixed rate is a fixed rate. So what do they do?
First and foremost, most interest rate quotes are all nearly the same. If there are differences in rates from one lender to the next, typically that change is measured in 1/8th of 1 percent. Despite the wild marketing claims you may sometimes read or hear, you’ll be hard pressed to find one lender who is ½ to 1 percent lower than anyone on the market. At least on a level playing field. Identical mortgage loans are benchmarked from the same index. One lender won’t be able to offer 6.00% while another can offer 5.00%, at least without additional fees. And that’s why it can be confusing to compare different mortgage offerings. The fees.
Mortgages will typically come from the source of the money, the mortgage banker, or from a mortgage broker who has agreements with mortgage bankers to market their loans. Brokers will get a break on mortgage pricing from those mortgage bankers who offer their mortgage loans to a broker on a “wholesale” basis. Brokers then mark up the mortgage to resemble a “retail” offering, which is then competitive with a mortgage banker’s retail operation. Usually the spread between any broker or banker is razor thin. With neither having the ability to have the absolute best rates, all the time.
Brokers make their money only on the initial loan. After the loan is transferred to the wholesale lender who provided the money to fund the loan, there is no other opportunity to garner income from that loan. Bankers however, can not only profit from the initial loan itself, but may also gain income by collecting monthly interest on the note or by selling it individually or in bulk to other lenders or loan servicers.
But again, the difference in initial rate is in the fees. While a mortgage rate may be 5.50% at lender A with zero points, another may offer 5.25% with one point and still another may offer 5.125% with zero points and $1,500 in fee income such as Administration fees, Broker fees, Funding Fees, Application Fees and so on.
That’s where the confusion begins to creep in. It’s difficult to compare these offerings due to the existence of loan fees. If no one charged any fees whatsoever, all you would see is the rate itself. Lender A offers 5.50% as does Lender B. As does Lender C. But fees do indeed exist and that is what can be confusing to the consumer. It’s easy for a broker to say “we don’t charge a $300 loan processing fee” implying that the broker is $300 less expensive in closing costs. The facts are that there may be other fees that add up to $300, just given one of several monikers such as underwriting, application, funding, administration and so on. No $300 processing fee, but a $300 document fee instead.
To ease the clutter, try this on your next rate quote adventure First, only compare lender or mortgage broker fees and nothing else. Title fees, attorney charges or recording fees are independent of your mortgage lender. They are what they are and the lender of choice has no impact. Yeah, I know there are various business arrangements that are out there that may reduce certain closing costs, but this is generally the exception rather than the rule.
Finally, ask for the exact same rate quote from all prospective lenders in 1/8th increments. “Please give me a good faith estimate for my loan at 5.25%, 5.375% and 5.50%.” This will help eliminate some of the gray area between points and no points along with additional fees that may appear between rate spreads.
From this stage, it should be easier. By setting the ground rules and sticking with the same mortgage product over the same period the dust should settle. And you’ll probably discover that yes indeed, most mortgage loans are alike. It’s the fees that tell the real story.Feel free to contact us with any questions.