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Mortgage Articles by Broker Deal
Transparent Pricing & Flat Mortgage Fees
by James Robert Deal
Mortgage Broker
The flat fee quote is another way we can save you money.
We look at your credit score, income, job history, and other factors and tell you how much we will charge. It is based on how easy or complex your loan is and how cooperative you are in terms of getting us the documentation we need. |
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Low Rates or Low Closing Costs |
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Should You Pay Your Closing Costs?
Or Get A Low Closing Cost Loan?
by James Robert Deal
Mortgage Broker
Consider the couple who plan to live in a home long-term. They are positive they are not going to refinance the loan for at least ten years. When they go to an Internet lender such as Ditech or to their local bank, they will find that loan officers there are trained to quote them a loan with no or low closing costs. Sounds good doesn’t it? Watch out! It's a trap....
The cost of money at a specific interest rate is fairly consistent from lender to lender. Closing costs must be paid. For Ditech or your local bank to give you no or low closing costs, they have to have a way to recover them. So what they do is jack up the interest rate. Then Ditech can turn around and sell your high interest rate loan for a huge Yield Spread Premium that more than pays back the closing costs they paid for you.
I can calculate just how high their YSP is because I have the same rate sheets they have. I have done the math. I have found that their interest rate will typically be 1/4 or 3/8 of a point higher than what I would charge in a situation where I would be earning the same amount that Ditech is making.
Or I could close the same loan at the same high interest rate Ditech would give you, and give you the same low $395 closing costs loan Ditech would give you, and then give you thousands of dollars back. And I would still make a healthy rebate without charging you any points in cash.
Again, I've done the math: To get Ditech's $395 closing cost loan, you will pay an interest rate that is a full 1.0 points higher than the loan I can get for you if you paid a reasonable amount for closing costs and loan fees. In the short term, yes, you save closing costs with Ditech. However, in the long term, you lose big time. Your interest rate will be higher, so your payment will be a higher. After about two years, the higher payments will start to exceed the closing costs you saved. If you keep the loan for five or 15 years, you will pay out tens of thousands of dollars more. That's the mortgage version of the movie Sicko.
If you are going to keep your loan for more than around three years, you will be better off paying your closing costs and getting the lower interest rate and the lower monthly payments for the other 27 or 28 years of your loan.
When would the jack-up-the-interest-rate method make sense? When you need to refinance to pay off credit cards or need cash for some other purpose, but when you know you are going to sell and move in one year. I've done loans like that. The borrower and I openly discuss jacking up the interest rate. The lender pays me a Yield Spread Premium big enough to pay my fee and cover all your closing costs. As long as you are going to resell quickly, such a loan would make sense. The higher payments you are paying would not add up to more than the closing costs you saved. You just have to do the math and compare.
Here is another case where the the jack-up-the-interest-rate method makes sense: If you are a first time buyer who has limited money for a down payment or for closing costs, it would make sense to increase the interest rate in order to cover some or all of your closing costs. We sometimes do that here at Deal Mortgage. The difference is: We give you all your options. Ditech and the big banks don’t. We tell you how much we are making. They don't.
It is always prudent to get a second quote from another money source. Fax me your good faith estimate and your credit report, and I'll tell you whether you are getting a fair deal. If you are, I will advise you to take it.
Call me at 425-774-6611 or 888-999-2022 for further information. Or e-mail me. The fax number is 425-776-8081. Click here to sign up for our e-mail messages, our printed mailings, or to request a call back.
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