Mortgage Pitfalls

When shopping for a home or investment property buyers often miss an important part to getting the most for their money. Often times they don’t realize the potential pitfalls of a Mortgage. I have worked with several Mortgage brokers and have been able to save my clients thousands of dollars when creating a mortgage. The best way to get a great deal on a mortgage is to have an understanding for the different ways that your lender or broker make money. Once you know how they make money you will be able to easily compare offers a pick your best deal.

The first and most obvious way a broker or lender makes money is thru an origination fee. Generally 1% of the loan amount is charged to the property buyer, but this percentage can be lower or higher and can even be 0%. You will often hear companies offering to do your loan with “No Closing Costs.” This is rather deceptive however because their “no closing costs” are often made up for in two other areas.

The second being fees. You will generally be charge an appraisal fee, a processing fee, even for postage. It may not seem like much, however lenders and brokers will often add a premium onto the fees to make up for the lower origination fee. I have seen appraisals on homes that would normally cost the borrower $300 being raised to $600. The processing fee can vary widely as well and you may also see a “commitment fee.” That’s a new one that I’ve been seeing recently. Basically the lender is charging you for their “commitment” to you. Isn’t that nice!

Now I will address the Yield Spread. This is a term that you will learn to love. If you bring up Yield Spread to a lender or Mortgage broker you will see mouths open in amazement. The YSP or Yield Spread Percentage is the difference between the interest rate you are charged and the rate your lender or broker is being charged. An example of this would be: Your Interst rate is 6.25% and the mortgage broker is getting the money for 6.0%. That “spread” can equate to thousands of dollars in commissions to the mortage broker or lender. By all accounts I do not advocate Mortgage brokers and lenders not making money. However, there are a fair amount of people being bilked out of a lot of money. When you hear “we don’t charge closing costs” you will now know that the yield spread is probably not in your favor. Often times when you look at closing costs being higher for one company versus another you also need to look at the difference in the interest rate you’re being charged. If you are paying 1/8th of a percent more on a $300,000 loan you will pay $390 more per year.

One unsuspecting person told me of a Mortgage broker that with her credit score not being perfect (her FICO score was 640) she qualified for a loan at 8%. After speaking with a second mortgage broker that I referred her to he offered her a loan at 5.625%! As you can imagine she was stunned. This is definitely an unusual case, but it does and will continue to happen. Unfortunately, in most states their aren’t real tight restrictions on what is allowed in pricing a loan.

I realize in writing this many people will ask “how do I know how to look for any of this?” First off get more than one opinion. I’ll say it again get more than one opinion. If you have more than one company or mortgage broker competing for your loan you’ll be able to compare the two. You can often ask your Realtor who they would recommend take their best person and compare them with your bank and or a third company. Some mortgage brokers will get mad at you because they don’t want to go thru the hassle of competing. Move-on! The lending industry is getting more and more competitive everyday. With the number of homes being refinanced declining rapidly you will find people and companies hungry for your business.

One more warning! If one of your two or three potential suitors makes claims that they can out-do the others in what seems to be a huge difference especially when they already know they’re in competition be prepared to have this change before closing. Make sure to get your interest rate and fees locked-in and in writing. You may get a lot of verbal promises, but don’t believe them until you get it in writing.

My last bit of advice when getting a mortgage if there are changes made by a lender or broker after you have had these promises made don’t be afraid to walk-away and get someone else’s help. If you feel like they are trying to take advantage of you stand up for yourself!

Technorati Tags: