Secrets big lenders want to keep hidden from you.
The general public regards the mortgage industry as a mystery, and well they should. The complicated inner-workings of the finance industry are better left to the suits on Wall Street, right?
Based on my experience working with clients over the years, I’d say the vast majority of people don’t truly understand how to price a mortgage and leave themselves vulnerable to being fleeced unwittingly by a large corporate bank.
My brother, a hard-working family man, just about got HOSED.
Take my brother, as a recent example. He works crazy hard to support his family as a music teacher in a state across the country. Keeping up with his schedule seems nearly impossible as he teaches large classes during the day, instructs private students at night, and plays weekend gigs.
He gave me a call a few weeks ago because he received in the mail what appeared to be to the regular consumer, an incredible deal on a refinance from a large mortgage lender. Relaying the numbers to me over the phone, admittedly even I initially thought it was something he should pull the trigger on.
Before hanging up, I asked him to text me a copy of the loan proposal so I could look over it, and boy is he glad he did.
As I perused the proposal, something didn’t look right. Closer inspection revealed that the proposal was for a good rate (in my estimation), but his closing costs exceeded TWELVE THOUSAND DOLLARS for a loan of only 270,000.
Here’s the kicker: it took me, an industry vet of 20 years, some digging to find the actual charges this lender was proposing for him. You think my over-extended brother would have any idea?
Now, if someone wants to pay extra in closing costs, that’s fine, as long as THEY know why, and it brings the benefit they are looking for, and they are happy with that particular decision.
Let me pull back the curtain a bit and break this down.
Closings costs, as shown on confusing government-required documents, may not convey clearly the information you want.
Closing costs on a mortgage really can be split into TWO categories:
- FEES associated with the obtaining the MORTGAGE FINANCE PACKAGE.
- COSTS associated with obtaining a HOUSE.
FEES associated with the finance package are costs like title fees, appraisal. Any fee that gets charged as a result of the mortgage itself because of the service a company renders to get that mortgage. Someone who buys a home in cash may not necessarily need these services and therefore may not need to pay the fees, or at least be required to do so.
COSTS associated with the house one might incur regardless of whether they get a mortgage or not. These included property taxes, homeowners insurance, or HOA charges.
What makes this tricky for consumers to understand is government-required costs-disclosures appear to lump the costs and fees all together. In reality, the costs as outlined above really don’t change since they’re not directly related to the mortgage but rather the costs of owning a home.
So what we want to concern ourselves with are the FEES list above, because those ARE directly a result of obtaining the mortgage itself-and really, it’s quite simple, but many lenders, like the one ‘helping’ my brother, like to gloss over this.
Here’s how it works.
A typical mortgage fee package typically sits around 2500-3000 bucks. It can vary a bit on loan size and if an appraisal is required. Some lenders will add on extra fees to this number, but the typical third-party fees to get you a mortgage will sit in that range.
Why then, are some mortgages so much more expensive (or less expensive for that matter) than 3k?
Here’s the big secret: mortgages are bought and sold based on the INTEREST RATE. The higher the rate on a mortgage, the more valuable it is to an investor who BUYS that mortgage, so they’ll pay more for it.
Conversely, a mortgage with a LOW RATE, becomes less valuable to an investor, so they’ll pay LESS for it when it’s sold.
How does that effect you?
The market dictates a system of credits or charges based on the mortgage interest rate that is attached to the mortgage itself.
If the rate is higher than the rate of the day, then there are CREDITS available to cover the fees in all or in part (anyone hear of a no-cost mortgage?).
If the rate is LOWER, then not only are there NO credits, but there are additional CHARGES to get that rate, which is exactly what was happening with my brother. The proposal gave him an extremely attractive rate, but the costs to get it were far from worth it.
Here’s a hypothetical example for a lower fee loan:
Closing Fees: 3,000
Higher Rate Selected (credit): -1,500
Final closing cost package: 1,500
Now, a hypothetical for a higher fee loan:
Closing Fees: 3,000
Lower Rate Selected (charge): 1,800
Final closing fee package: 4,800
You can see that the costs don’t really change at all in these scenarios, but the credits or charges do.
Here’s the Trick: usually there is a closing cost/rate combination that fits exactly what YOU need. The market fluctuates daily and those charges/credits change daily with the market.
An approach that insiders use quite successfully examining a combination of factors to come up with the perfect scenario. Cash to close, how long one wants to hold the new loan, payments, current array of lenders and associated offerings, etc. all go into making the right decision.
IMPORTANT: Many lenders out there can sneak in additional costs. For example, the base closing cost package may be 4k instead of 3k because of an added fee. Or, they can start with a much higher baseline in rates and keep credits that could get passed on to you.
That’s why getting a rate proposal with all the associated costs is critical to making the right decision and not coming away unwittingly fleeced.
So what happened to my brother?
He found that the 10k extra in closing costs from the lender’s proposal did this:
Paying the extra 10k a month only saved him 84/mo. After 119 MONTHS would he finally recover that 10k, which is almost ten years. Since he was confident that he’d be getting a new loan within 10 years, it wasn’t worth it. He elected for a loan that had a bit higher rate but a super low closing cost package.
What really makes that whole scenario frustrating is the large banks KNOW that statistically people are unlikely to keep their mortgage for longer than a few short years. Seriously, how old is your current mortgage?
With those big charges up front, even WITH a below-market rate, that lender stood to make a pretty darn big take up front. And guess what? Another offer to a similar refinance is likely be coming within a year.
Read Next: What about taxes, insurance and HOA? Doesn’t that raise my costs too?
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