Today I am pulling back the curtain on a subject your bank may or may not want you to know-how we know what interest rate to offer the consumer and what this rate can do for you. Many of you may understand that more than one interest rate is available on any given day. In previous posts we have discussed how credit score, type of loan, and amount of the loan may impact your rate up or down. Some of you have heard the words "discount points" being tossed around and understand that if a borrower pays a discount point they normally will get a lower rate. (A discount point being 1% of the loan amount-so one point on a $100,000 loan would be a $1000 added to the closing costs. The 1% does not correspond with a 1% reduction in rate-for instance discount point on a conventional loan at 4.6250% would bring the rate down to 4.25%.)
The first thing that the consumer needs to understand is that interest rates have credits to the consumer attached to them. So again, using 4.625% as an example, there is a credit of 1.388% (of the loan amount) attached to it. 4.25% has a negative credit of .988%-meaning the borrower would have to pay the .988% (or $988.00, assuming the same $100,000 loan) to receive that interest rate. There are other rates in between 4.25% and 4.625% with varying credits or negative credits. But let's examine the 4.625% and the 1.388% available credit. What happens to that $1,388.00?
The Federal government says that Mortgage brokers must disclose this credit-known as an overage to the consumer. So now you know that there is a 1.388% credit if the 4.625% interest rate is chosen. On our $100,000 loan that is $1,388.00. Had you gone to your bank chances are you would not know about that credit. You see Federal law says mortgage brokers have to disclose the overage-but banks have the choice-they may or may not disclose the overage. And now here's the BIG DEAL to you as the consumer-Mortgage brokers are required by Federal Law to GIVE THAT CREDIT TO THE BORROWER to assist in paying for the costs of their loan. The banks however have the choice of giving the overage to the consumer, or keeping it to add to either the bottom line of the bank or the salary of the loan originator. That practice and how it is implemented varies from bank to bank.
So normally when I look at pricing a loan I will say- Mr. Consumer...I can give you XYZ interest rate and I can pay $ABC towards your closing costs or I can give you a lower rate and you may have to pay a little bit more for your closing costs. That way you have the choice. With the bank-you may have the choice-or then again, you may receive the same XYZ rate I am offering and not receive the benefit of the overage towards your costs because it goes into the pocket of the originator or the profit margin of the bank. It's all perfectly legal-but it is a huge difference between banks and mortgage brokers.
The point is, your bank may be giving you a great deal-but they don't have to. When you read about a loan with no closing costs-this is what they are talking about-using the overage to pay your costs. It's not that the bank is so incredibly generous. Banks are in business to make money-as are we-we just show you where the differences are.
Mortgage brokers have been given a black eye by the banks for a long time-but the facts are we can normally compete with any bank on rate and closing costs-the only difference is we have to disclose what we are doing. They don't.
No comments:
Post a Comment