The Critical 7 Questions to Ask When Shopping for a Mortgage.

7-questions-to-ask

You know that getting a lower rate means a lower mortgage payment. This is true regardless of whether you are buying a house or refinancing. But where do you begin? Do you apply online and in turn have your information sold to multiple, probably pushy salespeople? Do you contact your bank, hoping to get a break since you have money stored there? What about the constant letters, emails, and advertising banners from your current mortgage servicer? We answer this question by comparing who has better mortgage rates.

Regardless of the type of lender you are working with, there are 7 critical questions will give you an edge in negotiating your next mortgage. Before we get to the questions, you should know how banks, direct lenders and brokers make money.

How Banks Make Money

Banks and credit unions make money on the interest rate they give you. They make money by either servicing your mortgage or selling it on the secondary market. The amount of SRP paid is based on the value of the note when it is sold off. Banks usually lend their own money and operate at a high overhead. It’s expensive to staff top earning underwriters and funders. Therefore, It’s in a banks personal interest to give you the highest rate possible to make a profit.

How Direct Lenders Make Money

A direct lender or lender also makes money on the interest rate sold to the consumer. While some more prominent direct lenders service their mortgages, most medium-sized, and smaller lenders sell mortgages as soon as closing on the secondary market. You see, lenders have an expensive line of credit which they use to fund loans. By borrowing money for a short-term from a bank or a private institution. You can expect higher rates from a direct lender because of the cost to operate lines of credit along with the high overhead required to act as a direct lender. They too make a large profit by selling you a higher rate.

How Brokers Make Money

Brokers make money by pairing your mortgage with a wholesale lending partner. Brokers set compensation with each wholesale lending partner, approved every quarter, and may not deviate from this set amount. Brokers usually do not have a line of credit or employ high salary underwriters and funders. Instead, the wholesale lender will underwrite and fund your home loan. As a result, most brokers may operate with very little overhead fees. Not all brokers pass along the savings; we do. We designed Candor Mortgage to run very efficiently using the latest technology. We do not pay our people commission because we want them concentrating on your needs, not their wallets. We are compensated by our wholesale lending partners. 

Key Factors that Will Affect Your Mortgage Pricing

There are a few things you should know before contacting any company and getting a rate quote or getting pre-qualified to buy a home. The first thing is your credit score. Your credit score is one of the main factors that will impact your interest rate or closing costs. Credit scores range from 300 to 850. A credit score over 740 will usually qualify you for the best mortgage pricing. It’s important to know that while you may get a bank’s best pricing, it could still be higher than what a broker like Candor Mortgage may offer.

You should also know how much you can expect your home to appraise. You’ve probably received flyers from realtors listing how much your neighbors are selling their homes for. Those are usually a pretty good indicator of your home’s value if your home is of comparable quality. You should also check that against online search tools, like Zillow; we can also send you your home’s estimated value. We don’t need to pull your credit or make a loan application to do this.

Learn to Talk Like an Insider with some Industry Jargon 

Knowing industry terminology will help you when shopping for a mortgage because it shows that you are savvier than the typical borrower. Understand these terms for better shopping experience:

  • Par Rate: The par rate is the interest rate a borrower may qualify for without any markup or interest rate manipulation. In other words, it’s a rate without paying any points nor yielding much lender credit.
  • Loan-to-Value (LTV): The LTV is a term often used to describe the ratio of a loan to the value of your home. For example, if your home is worth $600,000 and you are getting a new mortgage for $300,00, your LTV is 50%. LTV = Home Value/Mortgage. If your LTV is at or below 60%, you can expect better mortgage pricing.
  • Lender Credit: When you select an interest rate above par, you may receive a credit which will be used to offset closing costs. You accept a little higher price in exchange for less closing costs.
  • Discount Point (points): A point is an amount you pay as a tradeoff between higher closing costs and interest rate or mortgage payment. Usually, a point is 1% of your loan amount, but they may not always be round numbers.
  • SRP: After a mortgage closes, it may be sold on the secondary market. A service release premium (SRP) is compensation received by a bank or lender on the sale of a closed mortgage loan.
  • YSP: A Yield Spread Premium is similar to SRP. It is compensation received by a broker for selling an interest rate above par. In 2010, President Obama passed the Dodd-Frank as an answer to the 2008 housing crisis. The act made YSP illegal.
  • FNMA MBS: We mention Fannie Mae (FNMA) Mortgage-Backed Security (MBS) because it is a way for you to see and actively track interest rates movement visually.

7 Questions for Getting an Accurate Loan Estimate

  1. What is your best par interest rate you can offer with no points or lender fees?
    While this seems like a fundamental question to ask, you will be surprised how many responses you will receive, most of which will be indirect. Par is the rate a mortgage loan originator is offering without any markup or discount. By getting the par rate from company to company, this will allow you to compare mortgage offers accurately.
  2. What lender, appraisal, title, escrow, notary, and 3rd party fees do you charge? I would like to know the total closing costs.
    If you are shopping lender types, you will discover that lender fees, appraisal, title, escrow and 3rd party fees will vary from company to company. By comparing the par rate with the total cost to obtain a mortgage, you are well on your way to comparing and getting your best mortgage offers.
  3. Do you charge a fee or deposit to lock and when may I secure my lock?
    This may seem like something minor, but it’s very important. Here is why. A company charges a lock fee (often non-refundable) to ensure you will move forward with them regardless if you find a lower rate. A common practice with some companies is not locking a loan until the appraisal is received. From the initial conversation, this could be as much as 10 days where a borrower is at risk against the market. At Candor Mortgage, we do not charge any lock deposit fees and rely on our service and pricing to earn and retain your business.
  4. Are there any mortgage discounts or promotions I may be eligible for?
    Affordable lending programs like Fannie Mae HomeReady and FreddieMac HomePossible are not only for first-time homebuyers. If a lender is not knowledgeable or doesn’t have a system in place to check, you may miss out on possible additional savings.
  5. Can I get an estimate in writing?
    If you have followed steps 1 to 4 so far, you should have a legitimate rate quote. It’s time to get your loan estimate in writing. Make sure you request all the rate options you discussed in writing along with any associated closing costs and lender credits.
  6. How quickly can you close my loan?
    Asking the lender “How quickly are you able to close my mortgage?” is hugely important because closing quickly indicates competence. Plus, who wants to deal with a mortgage application for more than a few weeks? We often close or are ready to settle in 11 days at Candor Mortgage to give you an idea.
  7. Do you have a price match guarantee?
    We include this because we see this as a new trend which is alarming. A price match guarantee is usually nothing more than a sales tactic designed to build confidence in a particular company by making you think you have a safety net. If you read the fine print, nothing could be farther from the truth. We at Candor Mortgage choose not to have this type of guarantee because we do not need to. We are giving you our best loan offer upfront without holding back or trying to trick you into thinking you are getting a better mortgage than you are.

Good job reading this article and if you follow these steps, you will be able to make an apples-to-apples loan estimate comparison. Getting and knowing the numbers upfront without high-pressure sales or bait-and-switch tactics will help you choose the right mortgage.

Who Has Better Mortgage Rates, a Bank, Direct Lender or Mortgage Broker?

boxing-gloves

Faster.  Lower.  Better.

These are the advertising keywords you probably see every day.  It seems all mortgage companies advertise the best service, lowest rates and closings in the blink of an eye.  One of the biggest mistakes loan shoppers make is assuming that everyone is the same.

The three types of companies are a bank, direct lender or mortgage broker.  When shopping for a mortgage, you have many choices.  By knowing the difference, you will identify which company type is right for you and how to get a better loan.

Mortgage lending differences

While there are many differences between the three types of institutions, there is one common factor.  A conventional loan from a bank, direct lender or mortgage broker is the same Fannie Mae or Freddie Mac loan.  The only difference may be the interest rate and closing costs.

Banks and direct lenders lend money and underwrite loans, brokers do not.  Banks use their own money or borrow from under banks or even the Federal Reserve.  Lenders have access to one or more lines of credit from a bank or financial institution.  Think of this like a big credit card.

Think of this as a credit which can fill up and max out.  These lines of credit can very profitable or costly.  When banks and lenders take on the responsibility of underwriting a loan, they accept the risk of an unmarketable loan.  This is a very expensive proposition.  Often scrutinizing and requesting more paperwork.  A broker does not lend directly or have a line of credit.

Banks and direct lenders normally only have one option, their option.  Brokers work with multiple wholesale lenders and have access to multiple loan options.  The wholesalers compete for the broker’s business. These wholesale channels are not open to the public, you need a broker for access.

How Loan Pricing Works

According to the CFPB, nearly 50% of new home buyers do not shop for a mortgage1.  For example on a recent loan, we are competing with a bank and we are .25% better in rate and a similar cost.

Broker Scenario:

The principal and interest payment on a $375,000, 30-year Fixed-Rate Loan at 4.500%, $150,000 cash-out, and 38% loan-to-value (LTV) is $1900.07 with 0 points due at closing. The Annual Percentage Rate (APR) is 4.553%. The principal and interest payment do not include property taxes and home insurance premiums, which will result in a higher actual payment. Rates current as of 3/8/2018.

Bank Scenario:

The principal and interest payment on a $375,000, 30-year Fixed-Rate Loan at 4.750%, $150,000 cash-out, and 38% loan-to-value (LTV) is $1956.18 with 0 points due at closing. The Annual Percentage Rate (APR) is 4.750%. The principal and interest payment do not include property taxes and home insurance premiums, which will result in a higher actual payment. Rates current as of 3/8/2018.

image of a graph showing a comparison between payments and savings over 5-years and life of the loan

A bank and direct lender set the interest rates and therefore the profit.  Brokers are compensated by the wholesale lender.  Operating as a bank or lender is costly.  Lending money and lines of credit cost money.  If there is a loan buy-back or cannot be sold, it’s very expensive.  To fund loans, you need to hire funders and underwriters.  This additional overhead is priced in the interest rate or closing costs and is passed along to you.

Brokers tend to have lower pricing compared to banks and direct lenders.  Brokers do not have the overhead of underwriters, funders or lines of credit.  Brokers do not have the marketing and management overhead either.  You probably will not see commercials from brokers on TV.  There will be no celebrity endorsements.  You will not find layers and layers of management or administrative overhead.  Brokers tend to operate with much less overhead.  As a result, brokers are often able to offer lower rates and costs compared to your bank or direct lender.

Who has the better service?

A bank, direct lender or mortgage broker will follow a traditional loan fulfillment model.  A banker/loan officer takes your application.  Your loan is then handed off to a loan processor.  A typical processor has 30-40 files to work on every month.  The daily attention given to a file is therefore limited.

Getting them on the phone is usually difficult.  To make matters worse, the processor is usually located in another state, in a different time zone and works in a processing call center.  The odds are stacked against you because another person is delivering on the promises of the banker

How we deliver better mortgage rates

We designed Candor Mortgage to operate with minimal overhead.  We don’t pay our people a commission.  Commission structures are used to manipulate people.  Plus, someone will probably put their commission before your needs.  We merged the role of the processor and loan officer to create a one-person support system.  The same person who helps you initially is also the same person who helps close your loan.  It’s really that simple. 

Get a rate quote today and see for yourself that our rates are lower.

Get a Jumbo Mortgage With Conventional Rates

Better-Jumbo

If you live in one of the counties in the table below, a conventional high-balance mortgage may be a better option if your loan amount is above $484,350.

Have you tried refinancing only to be told your loan is non-conforming or Jumbo?  Are you looking to buy a home only to be limited by your county loan limit?  It’s likely the county limit in your area for a conventional conforming mortgage is $484,350.  A mortgage above this amount is called a conventional high-balance mortgage.  Save by getting a conventional mortgage up to $726,525.  Now available in all counties throughout California.  If you are looking to refinance, get a better loan.  If you are buying a home, buy a home with less stress and a lower rate or cost loan.

Conventional High-Balance Mortgage Details:

  • Fast turn times, averaging 15 days or less
  • Purchase, Cash-out and Rate and Term Loans
  • Starting at a 680 FICO
  • 20% down for purchases
  • 80% Loan-to-value (LTV)
  • A maximum debt-to-income ratio is 43%
  • Primary and second homes
  • 1-2 units

Loan limits in California

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Is a 5/5 Adjustable Rate Mortgage (5/5 ARM) Right for You?

Best ARM Photo

An Adjustable Rate Mortgage (ARM) is not for everyone, but everyone should know about them.  If you know for certain you will be moving in the next 5-10 years, an ARM may be the better choice.  A 5/5 ARM just might be the perfect loan for some in 2018.  A mortgage with a lower rate can save you money.  People move for various reasons, life happens.  You may move for employment, family or housing needs.  According to the Census Bureau1, people move on average of 11.7 times within their lifetime.

How mortgage reform created a better ARM

In 2010, President Barack Obama signed into Federal law The Dodd-Frank Wall Street Reform and Consumer Protection Act2 (a copy may be found here).  The act eliminated risky features like pre-payment penalties and negative amortization.  Most ARMs today use a more stable index.  For example, a 5/1 ARM uses the 1-year Libor while a 5/5 ARM uses the 5-year CMT.  To find your interest rate, add the index + margin.  

Is a 5/5 ARM, a balance of stability and lower rate?

A 5/5 ARM might be the better choice for some.  The low initial rate stays fixed for 5 years.  After 5 years, it adjusts once and is fixed for another 5 years.   That’s two adjustments in 15 years.  A traditional 5/1 ARM is fixed for 5 years and then adjusts every year thereafter.  The rate can adjust by a maximum of 2% every five years.  The cap or the limit of the interest rate change is 5% from your initial rate.  If rates come down, your rate will as well.

Choosing the right tool for the job:

Interest rates as of 2/21/2018.  This is some sample purchase loan rates for a purchase price of $500,000 and a loan amount of $300,000.

How much can you expect to save compared to a 30-Year Fixed?

Other considerations

According to the Urban Institute, only 2.1% of people obtained an ARM in 20163.  Close to 98% of consumers obtained a fixed rate.  In a low rate environment, an adjustable rate mortgage usually does not make sense.  If rates go up more, the spread will increase and Arms may be more attractive.  A 5/5 Arm is priced close to a 5/1 Arm and gives you more stability because the adjustment periods is every 5 years, not every year.

  1. For example, you plan on moving or refinancing in the next 5-10 years.
  2. You expect your household income to increase in the next few years.

Life is unpredictable.  While we always hope for the best, we should still plan for the worst.  You may want to speak to a financial advisor to come up with your worst-case numbers.  Basically, you will want to know the minimum income needed to cover your expenses if something were to happen.

Conclusion

An ARM may be a solid choice if you are planning on moving in the next 5-10 years.  Some of the pluses are a lower monthly payment or attacking your principal balance.  If you are considering an ARM, take a look at the 5/5 Arm.  It adjusts only once every 5 years.  In 15 years, there are only two adjustments.

Our goal at Candor Mortgage is to support you with solid advice.  We are here to give you the information you need to make the right decision for you.  If you’re interested in learning more or discussing your unique situation, call us at (800) 714-3184.


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Sources:

  1. https://www.census.gov/prod/2014pubs/p20-574.pdf?cssp=SERP.
  2. http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf
  3. Housing Finance at a Glance.  The Urban Institute.  March 2017, Page 9.  A Monthly Chartbook.  https://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-march-2017/view/full_report.