Last week’s column explored finding a buyers’ agent and negotiating commissions.Today’s features tips on mortgage shopping.
Mortgage shopping can be a complicated and time-consuming process. Here’s what you need to know to educate yourself — whether you’re on the road to homeownership or refinancing an existing note.
If you’ve previously had a good experience with a mortgage loan originator, go right back to that person. Like I said last week, don’t fix it if it’s not broken.
If you don’t already have an excellent mortgage loan originator, ask trusted family and friends for recommendations.
You can ask your agent or the homebuilder, too, but be careful. Some agents will honestly provide their best recommendations. Others may have a business relationship with a lender or a requirement from their firm to direct you to lender X. That type of relationship is probably more focused on profits than your best interests. Higher profits are always at the consumer’s expense.
If you want to check around to see what else is out there, your shopping categories include depository institutions like banks and credit unions, non-depository institutions (aka mortgage bankers), and mortgage brokers.
Pluses and minuses of each
Banks and credit unions may offer extra competitive pricing when it comes to portfolio lending. This is typically for jumbo mortgages whereas the institutions can loan out its customers’ deposits with more aggressive pricing.
Another thing banks and credit unions may offer is pricing discounts, if you are willing to bring deposits from another institution. For example, you might receive a one-quarter percent additional interest rate discount for every $250,000 in deposits you bring over.
On the minus side, depository institutions tend to have narrower mortgage menu offerings. They do not have a fiduciary duty to the consumer. This is simply a transaction to them. So, they will sell you whatever they have, regardless of whether their pricing is market competitive or not.
Non-depository lenders or mortgage bankers are solely focused on selling mortgage instruments, not auto loans and credit cards like banks may offer. They may be very price competitive on a day-to-day basis.
On the minus side, mortgage loan originators who work for mortgage bankers may be able to directly charge borrowers loan origination points and receive back-end rebates or yield spread premiums (compensation) from the likes of Fannie Mae and Freddie Mac. These are legally undisclosed profits, surely at the borrowers’ interest rate expense.
Mortgage brokers, similar to insurance brokers, offer the widest menu of loan products. For example, if you need an exotic, creative mortgage such as a so-called non-QM or non-qualified mortgage, brokers are the place to go.
Mortgage brokers also have a fiduciary duty to the consumer-meaning they must act in the consumers’ best interests.
On the minus side, mortgage brokers may not be as competitive as depositories when it comes to jumbo loans.
Shop with three different providers. I’d suggest you contact a bank or credit union, a mortgage banker and a mortgage broker. Shopping does not mean applying. It takes a lot more time to apply. Shopping just means finding out generally what each can offer you.
Go over your exact parameters with each provider. For example, I’m buying a $700,000 home with 10% down. I can document my income with W2s and tax returns. My middle FICO score is approximately X.
Assuming you are comparing the same financing instrument such as a 30-year fixed rate, focus on the interest rate, loan origination points and all other closing costs.
Once you figure out who is probably offering you the best deal, which includes pricing and fast service, then you can go into the granular details of points with that provider.
Is it a good idea to pay points?
Keep in mind paying points upfront is nothing more than paying interest in advance to obtain a lower interest rate.
Think of a teeter-totter. The lower the rate, the more the points. The higher the rate, the fewer the points.
Say you were offered a 5.625% interest rate with 2 points on a $630,000 loan amount. And you were also offered a 6.125% rate without points. What’s the better deal?
The monthly principal and interest at 5.625% is $3,627. The points in real dollars amount to $12,600. The principal and interest at 6.125% is $3,828. The monthly payment difference between 5.625% and 6.125% is $201. Divide $12,600 in points by $201 in payment savings takes almost 63 months to break even.
In this example I’d advise the borrower not to pay points because it takes more than five years to break even. Refinancing opportunities into a lower rate (assuming mortgage rates come down) may likely come along in less than five years.
Also, always run an internet search on the mortgage loan originator and his or her firm. You may learn a lot.
And always check the license of the mortgage loan originator to be sure its valid and there is no disciplinary action against the MLO.
Freddie Mac rate news
The 30-year fixed rate averaged 6.3%, 4 basis points lower than last week. The 15-year fixed rate averaged 5.53%, 2 basis points lower than last week.
The Mortgage Bankers Association reported a 4.7% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $11 more than this week’s payment of $4,992.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.375%, a 15-year conventional at 5.125%, a 30-year conventional at 5.875%, a 15-year conventional high balance at 5.625% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year high balance conventional at 6.375% and a jumbo 30-year-fixed at 6.25%.
Eye-catcher loan program of the week: A 30-year mortgage, fixed for the first five years at 5.375% with 30% down payment and 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.