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Things All Clients Need To Know About Mortgages.

By Roccy M. DeFrancesco, JD, CWPP™, CAPP™ - Email Editor

Date : 15-May-2007

Dear Subscriber:

When I decided to put together the new Master Mortgage Broker (MMB™) certification course, I had a steep learning curve. I had to recruit mortgage professionals who have been in the industry for years to help me learn the topic and put together the course material.

While the learning curve was steep, the knowledge I gained and those who take the MMB™ will gain is substantial. I thought I would pass along some of the basics of what I learned to TrustMakers readers. I’m confident the following will not only be an eye opener, but will also help readers save money on their next mortgage.

To understand this newsletter, you need to be familiar with a few key terms.

Loan Origination (LO) Fee—Generally speaking, a LO fee is the fee added to the closing costs of a loan by a broker who is looking to be paid on the “front-end” of the loan process. If a loan is $100,000, and there is a 1% LO fee, the broker will make $1,000 at closing (which will be an up-front closing cost the borrower/client must pay).

Discount Points (DP)—DPs are charged by the lender as an up-front cost at closing, which allows the borrower/client to “buy-down” the interest rate. For example, the DP might be 1% of the entire loan balance as a closing cost to buy down a loan rate from 6% to 5.75%. A mortgage broker makes no money from DPs charged at closing.

PAR—The interest rate a lender allows a mortgage broker to offer to borrows. If a mortgage broker sells a loan at the PAR rate, he/she will make NO money on the loan unless he/she charges the client LO fees at closing.

Yield Spread Premium (YSP)—The YSP is the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale “PAR rate” that the borrower qualifies for. For example, if the PAR interest rate is 6%, the broker could offer it to a borrower at 6.125%. When a loan has a YSP, the broker is making money on the “back-end” from the lender. With this example, the mortgage broker might be making 1% on the back-end (meaning that the lender after closing will pay the broker $1,000 on a $100,000 loan).

The good thing with a YSP is that the client is not typically charged LO fees at closing. The bad is that the client has to pay a higher interest rate for the life of the loan.

Significant Latitude in Pricing a Loan

I had no idea a broker had so much latitude when pricing a loan. This latitude is a double edged sword and can really hurt an unknowledgeable consumer. A broker who thinks he/she can get away with a high priced loan might sell a loan to a client with a 1-2% LO fee (up-front fee) and with a 1-3% YSP (back-end fee). This would be excessive and not in the client’s best interest.

Things about your last loan

Did your mortgage broker explain how the loan was priced? Did you pay LO fees at closing? Do you know if the mortgage broker who priced your loan built in 1-3% YSP?

As I say over and over, knowledge is power, and The WPI believes that clients who understand what is being discussed in this newsletter will be able to better shop their next loans and save significant money. Nearly all clients have multiple loans during a lifetime, and if you can find a loan that has an interest rate which is lower by .25, .5%, etc., think how much money you’ll save over a lifetime.

Typical Loans

Most loans sold by brokers have a back-end YSP. That way a client does not have to pay LO fees at closing. There is nothing wrong with a loan that has a YSP because the broker has to make money when putting a loan together. It can come from a front-end LO or/or a back-end YSP.

Typical Questions

The typical questions once you understand how loans are priced are:

1) Is it better to buy a loan with LO fees or a YSP?

2) Is it better to buy down a lending rate at closing by paying points?

Surprisingly, the answer to these questions is not very difficult to answer. The answer depends on how long the client plans on keeping the loan. FYI: The average loan in this country stays on the books of a lender for less then five-years.

Additional Information on Loan Pricing and Commissions

Due to space issues, I do not have time to give you the math which explains the answer to these questions. However, I do have an education module on Mortgages you can purchase from TrustMakers which explains loan pricing in more detail. Cost of the module is $27, and I can state with confidence that the module will save you 10-100 time the cost on your next mortgage.

1% CFA Mortgage

Finally, it still amazes me how few clients and advisors are familiar with the 1% Cash Flow Arm mortgage. I figured since I was doing a newsletter on mortgages, I should throw in a little bit on this type of mortgage. We typically use this type of loan for anyone looking to build wealth in a tax favorable manner by using the equity in their home. In the mortgage module, you will also learn all about the 1% CFA mortgage and if it is right for your particular situation.

Summary

Again, knowledge is power. When you know the basics about mortgages and how they are priced, you can save yourself a lot of money on your next mortgage. Learning this subject matter is not difficult, and I recommend to educate yourself so you are not taken advantage of in the future by a mortgage professional who is advisor focused and not client focused.

Finally, if you are thinking about refinancing or buying a new home with a new home mortgage and want to work with a mortgage professional you can trust, please contact TrustMakers who will refer you to someone you can work with.

Roccy M. DeFrancesco, JD, CWPP™, CAPP™

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