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 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
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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 a 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 a 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 the 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
- 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.
- 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.
- 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 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.
- 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.
- 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.
- 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.
- 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.