Let’s say you call a bank and ask for the rates on a loan. First, know that the Bank ONLY has THEIR rates and you have no shopping going on. A broker on the other hand may have as many as 200 lenders in their database from which to choose. The good ones have computer sorting to find the best ones each day!!! A good broker may get you a loan from the bank you just called and at a lower rate!!! READ ON….
They may quote you a rate and you have no idea what that means. You may think you know but you DON’T. They may quote a rate with high fees so the rate sounds low. They will assume your credit score is over 750, which is where the best rates are. You may get much less. This tactic is to get you in to fill out an application and run your credit (which will ding your FICO score 3 points!!) DON’T FILL OUT ANY APPLICATIONS till you are sure you want to proceed to close with that lender. Read the next blog to understand why. KNOW YOUR FICO SCORE AND debt to income ratio (if you can) before you call for quotes.
The “PAR” rate is one that you should understand. Always ask for this rate when making comparisons. This is the interest rate you get with no points charged. They are looking at a range of rates with corresponding range of points (fees) to each rate. Low rates have higher points/fees. You need to always compare apples to apples (par rates to par rates)
Which is best for you??? Low rates and high points or higher rates and low points. To determine this, think 7 years. This is the number that end buyers of the loan use to establish their returns on their purchase. Buyers are huge outfits like insurance companies, Fannie Mae etc. They buy blocks of loans for hundreds of millions of dollars at a time. The typical loan lasts 7 years so they use that to determine what to pay for the loan.
You should also consider that 7 year number when deciding on what rate you want. The available interest rates are a sliding scale with the lowest rate corresponding to the highest loan points. No points (the par loan rate) is what to use as a basis. For instance, if you are offered a 3% loan it may have a cost of 2 points plus you pay all the loan fees. If you intend to keep that loan beyond the 7 years, you may come out ahead by taking the rate with lots of up front fees. If you think you will sell or refi in 7 years, take the higher rate and no fees.
A “no out of pocket closing cost loan” can mean that all those fees are ADDED TO YOUR LOAN BALANCE. Beware of this. If you were to pay off the loan via a refi in a few years you will LOSE all those fees, which could be around $10,000. If you plan to sell, refinance or pay it off soon, take a little higher rate with all the fees paid by the bank. A no closing cost loan!!
A no closing cost loan means that the interest rate is raised enough so the the higher corresponding YSP is high enough to pay all the fees, including the title, appraisal etc. In this case you will pay a higher interest each month for 30 years, but have not added any of those fees to your loan balance. This is the choice to make if you intend to pay it off soon! If you know you will refi or pay it off in a couple years, take the no cost loan AND ask for a Binder Policy from the title company. You will pay 110% for the insurance policy but get a 100% refund toward your refi later. Hardly anyone knows of this. Could save you a thousand dollars!!
Shop all your sources the same day!!! The rates change daily, sometimes a couple times a day. To be fair to yourself and the brokers, compare companies on rates quoted on the same day. Obviously this is a huge task that can take all your time. Using a broker with computer sorting can do it for you in a flash. The broker can shop the wholesale rates but you have to “shop” the broker too!
So….there are TWO sets of considerations here. The wholesale points that the loan costs from the bank AND the YSP, which is the broker commission paid to them from the bank. Both are connected to the interest rate on the loan. A slightly higher rate, (1/8 pt) may yield $6,000 in YSP to the broker. If you have a good relationship with the broker, much of that YSP can come back to you to pay closing costs.
I’ve seen brokers charge origination points, processing fees, underwriting fees, etc. AND keep all the YSP for themselves. Kind of GREEDY. Others may charge NO fees and share that YSP with you the borrower to make a GREAT loan for you.
How much can you save? LOTS!!! I see folks save a full 1/2% on the interest rate – which amounted $1,200 per year and broker credits an additional $2,000 from the YSP toward closing costs. This is compared to three of the nation’s biggest lenders.
Email me!!! I would love to become your friend and assist with the whole process. Let me help you connect with the best place for a loan.