| You hear the commercials everyday on the radio. You | | | | Whatever. |
| see the billboards along the highway. ‘No Points,’ | | | | The reason is the high backend rebate. It may not be |
| ‘No Closing Costs.’ | | | | charged to you directly but your still paying for it. |
| The mortgage industry has become extremely | | | | The rebates on this can be as high as 3.4 points. |
| competitive in recent years, with literally tens of | | | | Selling you on a three-year prepayment penalty does |
| thousands of licensed brokers in California alone. How | | | | that. It also means a higher fully indexed interest rate. If |
| did it get this way? In recent years with interest rates | | | | you’re getting into this loan for the 1% payment |
| at record lows it was an easy way for even | | | | only, then maybe you don’t care. If your real estate |
| inexperienced people to make a ton of money with | | | | market is going up faster than the loan amount is |
| little training, and no experience. The calls to refinance | | | | climbing, maybe you don’t care. If you are getting |
| came pouring in. If you could answer the phone you | | | | into this type of loan, make sure you’re asking |
| could make good money in the real estate lending | | | | about the rebate. If you are being charged points up |
| business. | | | | front and the loan officer is getting a high backend |
| I’m not trying to slander real estate professionals. | | | | rebate he’s ripping you off. One or the other, or a |
| Most are very good at what they do. It is simply that in | | | | reasonable combination of both. One point up front |
| any field as over crowded as this one has become | | | | combined with a 2.5-point rebate is reasonable. It |
| you will find those who will bend the truth, who will | | | | makes the total commission 3.5 points. Two and a half |
| forget to mention certain things, prevaricate or outright | | | | up front and 1.75, for a total of 4.25 is a little high, in |
| lie to get your business. | | | | most cases. Sometimes the amount of work involved |
| Let’s set the record straight, shall we? Nobody | | | | justifies the extra pay. As a general rule I think three |
| does this for free. I myself have seven children and a | | | | points is fair to all concerned. |
| beautiful wife to support. I need to get paid. For my | | | | How do you know what your loan officer is making on |
| pay I provide a quality service. Most of us in this | | | | the back? It is disclosed, but you need to know what |
| industry work on commission; the funny thing is I get to | | | | you are looking at. It’s called ‘yield spread |
| set my own commission on each and every loan, by | | | | premium’ or YSP. Be careful of this though. Just |
| charging ‘points.’ | | | | because you don’t see it does not mean it’s not |
| You may have heard the term ‘points.’ What is | | | | there. When your loan officer is selling you a loan from |
| a point? Simply this, a point is one percent of the loan | | | | his own company, he does not need to disclose the |
| amount. It’s called origination, or points. If I charge 3 | | | | YSP. The YSP is what the ‘broker’ charges |
| three points on a $100,000 loan it equals $3000. I get to | | | | over what the lender offers. If dealing direct with the |
| decide how many points I’m going to charge. The | | | | lender there is no YSP. Even if the loan officer can get |
| law in most states limits the number of points I can | | | | you that 6.5% and sells you the 7% instead, because |
| charge. To go beyond that is usury, and simply not | | | | he woks for the lender there is no YSP. Ask if he is a |
| allowed. That limit is as high as 6% in California or even | | | | broker or direct lender. As with almost anything either |
| higher in some states. I myself very seldom charge | | | | can be sold well. |
| more than three points. I also seldom charge less than | | | | If he’s a direct lender he’ll say things like “Our |
| three points. The number of points being charged is | | | | money, our rules.” Or “we can control it all |
| disclosed along with all other closing costs on the | | | | because we don’t have to play by the other guys |
| Good Faith Estimate or GFE. A word on GFEs, they | | | | rules.” |
| are an estimate, and some less scrupulous lenders | | | | If he’s a broker he’ll say “I deal with 30, 50, |
| really make the most of that fact. When I do one I try | | | | 200 lenders so I’ll get you the best deal.” |
| to be as close to actual costs as possible or even a | | | | Reality is that while where I work we’re approved |
| little high. Sometimes things as simple as the day the | | | | with over 50 different lenders I’ll price a loan with |
| loan closes or the amount a notary will charge can | | | | no more than half a dozen and usually I know before I |
| affect the actual amounts. On every loan I do I build in | | | | begin who will get the deal. Each loan is different and |
| a pad of $250. The reason is simple. I estimate | | | | one of the reasons I get paid is to know who does this |
| everything on the high side of reasonable and put in | | | | kind of loan. Is it ‘A’ paper or sub-prime? Is it a |
| the pad, because I’ve never had a client complain | | | | single-family residence, or a condo? Is it investment |
| that they got $31,000 at closing instead of the $30,000 | | | | property of primary residence? Do we need to do a |
| they asked for. Now imagine you needed to refinance | | | | stated income loan or full doc? |
| and take $30,000 cash out, and I delivered on $28,712 | | | | I get paid for my expertise. I get paid because I not |
| instead of the $30,000 you needed. | | | | only take your loan to the guy with the best interest |
| Make sure your loan professional discloses ALL fees | | | | rate but also to the guy will get it done quickly and |
| and not just his own. Often they will show you only the | | | | efficiently. If for example you were borrowing |
| fees that broker is charging and not put in the title | | | | $200,000 at 7.25% your monthly payment would be |
| insurance fee, or the escrow fee, or any other third | | | | $1364.35. What if you turned down the guy who told |
| party fees. Ask, “Are these all the fees I’ll | | | | you he could get it at 7.5% even though you thought |
| pay?” If the answer is “No,” run don’t | | | | he was the more qualified? You’re chasing the |
| walk to an honest loan officer. | | | | rate. How much did that save you? At 7.5% that |
| Typically the only part the loan officer gets paid on is | | | | same $200,000 costs you $1398.61 per month. The |
| the origination. Of that they will usually get a split with | | | | difference is only $34.26 per month. Now let’s say |
| the broker. I’ve seen splits that range from a flat | | | | you go with the cheaper guy. He came in cheapest |
| $500, to anything from 25% to 85%. The broker in | | | | because he was chasing your business. When you |
| most places makes their money from the other fees. | | | | don’t know what you’re doing the only way to |
| Application fees, processing fees, admin fees, tax | | | | compete is to try to undercut the other guy on price. |
| service fee, underwriting fee, wire transfer fee, and | | | | For $34 a month you get a guy who maybe can’t |
| more. Some are legitimate some are merely padding | | | | even get it done. The lender has poor service so the |
| the price of the loan. | | | | loan doesn’t close on time and someone else buys |
| Points are not the only way we get paid. We also can | | | | your dream house. |
| get a rebate from the lender. Let’s say I went to a | | | | For $34 a month I’ll take your loan to someone |
| lender with your file and they quote me an interest | | | | who will make it happen smoothly and quickly. |
| rate of 6.5%. I turn around and tell you I can get you | | | | As with anything you get what you pay for. Quality |
| 7%. For this I receive a one-point rebate from the | | | | service costs a little more. Beware of the guys who |
| lender. While at first glance this may seem sneaky and | | | | are either too cheap or too costly. Either is a sign to |
| dishonest, remember I’m getting a wholesale rate. If | | | | beware of. |
| you went there direct you would not receive the 6.5% | | | | Too cheap and they are chasing your business |
| rate. They offer it to me with room for me to make a | | | | because they really need it. Maybe they are very |
| profit. Some lenders will limit how much I can raise the | | | | good and just really want to give you, a total stranger |
| rate from what they offer me. | | | | the deal of the century. Possibly they are that good |
| The base rate that they offer is called ‘par.’ | | | | and just in a slump. It happens. |
| Those of you who are golfers will understand the | | | | Too expensive and they are gouging you. Trying to |
| term. It means basically the base rate. Even. No | | | | make all their money off this one loan. |
| adjustment up or down. That rate can go up for a | | | | If they are in the business for the long term, they’ll |
| rebate, or it can go down, IF you buy it down. Often | | | | want to build a relationship of trust with you. I want all |
| when doing this you are only buying it down for a | | | | my clients to come back again and again. Ideally I’ll |
| specific period so beware. | | | | help them into their first house. Refinance it for them |
| These are the biggest two ways to get paid but there | | | | so they can improve on it, and then help them buy a |
| are others. Let’s say you took out a | | | | bigger and better house when they start growing their |
| ‘Pay-Option-Arm’ or ‘Pick-A-Pay’ type | | | | family. Maybe we’ll refinance it to pay off the |
| loan. This loan comes with the opportunity to choose | | | | kid’s college loans. Then when the last kid is safely |
| one of four payment options each and every month | | | | on his own, I’ll help them downsize into a beautiful |
| for five years. You might choose to make a 15-year, | | | | condo by the beach. |
| or 30 year fully amortized payment. You could also | | | | This kind of relationship only happens when there is |
| choose interest only, or even a minimum payment | | | | trust going both ways. That trust is only built by |
| based on 1% interest, with the rest of the true rate | | | | providing quality service and sound advice. |
| tacked onto the backside of your loan. Fully discussing | | | | Your home is typically the single largest investment of |
| this loan is a subject for another article, but suffice it to | | | | your life. Don’t trust it to just anyone. Make sure |
| say this loan can be perfect or a disaster and | | | | you understand how much you’re being charged |
| you’d better understand the ups and the downs of | | | | and why. Pay for expertise. Pay for honesty and |
| it from the beginning. | | | | integrity. Don’t pay for inexperience or to pad a |
| On this type of loan all kinds of promises are made. | | | | greedy loan officer’s already overstuffed pockets. |
| “I can do it for Zero points! One point! 1.5 points!” | | | | |