FREQUENTLY ASKED MORTGAGE QUESTIONS
How do I know what type of mortgage to get?
The amount and source of cash available for down payment, closing, and pre-paids is generally the deciding factor.
The second most import factor in deciding is the income to debt position.
How long buyer will own the property (when it is possible to determine this).
Credit rating/score
How do you as Buyer select an appropriate rate and corresponding points or credit?
In the following example, we see six options to select from for combinations of rates, costs, or credits. Using a loan amount of $100,000, the following options are considered the pricing of the day. If it takes $4,000 to buy the 4.25% rate for the life of the loan, the Buyer actually sacrifices the credit of $2,000 available with the 5.50% rate as well
This creates a cash difference of $6000 between the extremes offered. By taking the difference in payments, (P&I $568 less P&I $492 = $76 per month) and then dividing that difference into the cost ($6,000), we find the following.
RATE P&I COST CREDIT
4.25% 492 4 discount points =$4000 0
4.50% 507 3 discount points=$3000 0
4.75% 522 2 discount points=$2000 0
5.0% 537 1 discount point =$1000 0
5.25% 552 0 0
5.50% 568 0 2% = $2000
$6,000 cost ÷$76 per month difference = $79 months. This means that it would take 79 months of saving $76 per month to recover the $6,000. While this may be appropriate for some but for many, it’s not the right fit.
Also, please note that a borrower who is “short” of cash may elect to use the 5.50% rate with the corresponding credit of $2,000 to cover some closing costs and / or pre-paid insurances and taxes.
What is meant by “Pricing the Loan”?
Fannie Mae, Freddie Mac, and Ginnie Mae all require pricing adjustments for loans with extreme characteristics. Most lenders provide a web program to enter information for correct pricing of the loan. These adjustments are used to offset the risk associated with the extreme characteristics. Statistics revealed through the examination of foreclosures have indicated these extreme characteristics carry a definable risk.
Lenders want to minimize losses on these foreclosures; therefore the pricing includes a measurement of the cost associated with these risks. These adjustments impact the options for both the rate and points.
Every loan must be individually priced and tailored to the characteristics of that loan. A combination of characteristics requires the Mortgage Loan Officer to seek a higher rate to offset these costs rather than have the consumer pay more in points.
How does the Mortgage Loan Officer get paid?
Mortgage Loan Officers get paid for what they do. Most Mortgage Loan Officers are professional and empathetic in their approach to clients and realtors. They seek to construct a team atmosphere between all of the different players in the drama referred to as purchasing a Home. This frequently includes the Mortgage Loan Officer’s processor, underwriter, closer, funder, post-closing quality control review team, the appraiser, the title company, insurance agent, surveyor, abstractor, and everyone brought in by the realtor.
There are two compensation strategies available to the industry, compliments of the Dodd Frank Financial Reform Bill that aimed to clean up the mortgage industry from the melt down.
The first option that most lenders employ is referred to as Lender Paid Compensation. It requires lenders to pay the Mortgage Loan Officer a preset amount on each closed loan. The preset amount of compensation is a percentage of the loan amount. It may NOT vary by any condition of the loan. The preset compensation may not vary based upon loan amount, quality, the type of loan, or how the loan gets to the secondary market. It does still allow for multiple rate and price options to the consumer. Each option is pre-computed to include the Mortgage Loan Officer’s compensation. The purpose of this is to prevent the Mortgage Loan Officer from steering a borrower into a rate or cost or program that nets him additional compensation.
The second method of MLO compensation is referred to as “Consumer Paid”. The intention of this method is for the MLO to be paid directly by the consumer. It still allows the yield spread to create a credit or a debit (also known as points) to the consumer. However, the intent is to prevent the resulting credit to then be paid to the MLO. The consumer is theoretically going to pay the MLO from their certified funds and apply the credit to their closing costs and pre-paid insurances and taxes. The appeal of this strategy is to allow the MLO to reduce his compensation in the name of competition. This method of compensation provides a model that allows for lower compensation to the MLO so he can compete against other offers.