What’s in common with a life insurance policy, an annuity, a ship, and a mortgage?
Answer: All goods are sold by somebody.
Homebuyers generally don’t think of a salesman as a loan officer, but we are, we’re selling money. Well, perhaps we’re renting money, and I’m getting confused. When someone asks what I’m doing for a living, I respond, “I’m selling money, are you going to buy some?”
What is today your lowest interest rate?”It’s the first thing a home buyer asks. No one ever looks for the best deal, just the lowest rate. Chasing the lowest rate when borrowing money can be a big mistake. That saves homebuyers millions of dollars each year for all the government’s efforts to protect the consumer. There are hundreds of laws, policies, legislation, and ways to protect the consumer.
A couple of years ago, a woman called for my best interest rate on a $150,000 first mortgage for a 30-year fixed-rate loan. I quoted her a 5 percent interest rate that she said was ridiculous compared to another lender’s interest rate. My price was very competitive at the time, so I asked her for more details. The other lender, an online company, quoted her 4.75%, a better rate than mine, obviously. I asked how much the closing costs were paid and their charges are $7,000 higher than mine!
The monthly payments were at 5% $805.23 and 4.75% [email protected]
Here’s the equation, $7,000 divided by $22.76 which is the compensation gap ($805.23— $782.47= $22.76) is equivalent to 307 or about 25 years.
If she pays the mortgage on time, she will never refinance or sell the property even in 25 years and seven months. I even told her if she borrowed her money from me she would buy $7,000 less that would make her fee $767.65 or $14.82 less than the other lender’s loan every month. She was still going with the other lender because they were asking her what she wanted to hear and giving her a good rate of interest. Wonder if she still feels that the prices are floating in the mid to low 3’s now was a good deal?
You think I’ve probably made up the example, I swear it’s true. And every day it happens. Homebuyers are going to call loan officers before they find one that tells them what they want to hear, a great mistake. We already know a good LO, talk to your Realtor.
Mortgage Secret #1
How you structure the entire deal is more important than the terms on one piece of the puzzle.
We have already seen how the lowest rate is not always the best choice.
Now let’s look at a hypothetical example, let’s say the sale price is $200,000 and our home buyer is going to finance the home with an FHA mortgage. The first lender quotes 3.25% and the second lender quotes 3.375% but offers to pay the Up Front Mortgage Insurance Premium (UFMIP) to FHA. The UFMIP is 1.75% of the loan amount.
Hold on tight! This gets weird…
FHA requires home buyers to pay the Up Front Mortgage Insurance Premium that almost all lenders are doing. It raises the amount of the loan by 1.75%, which also increases the amount of interest paid back to the borrower.
The minimum down payment on our $200,000 selling price is 3.5 percent or $7,000. This makes the $193,000 base loan before applying the $3,377 UFMIP ($193,000x 1.75 million= $3,377). When we add that we get a total loan amount of $196,377 to the base loan amount.
The $196,377 monthly payment’s principal and interest part at 3.25 percent is $854.65.
Mortgage Secret #2
When UFMIP is sponsored or paid in cash, FHA doesn’t care.
The lender decides how to do this if there is an option for them! This little secret is not open to most home buyers.
Mortgage Secret #3
FHA is not concerned about which party paying UFMIP, the buyer, seller or borrower in the deal.
The rule on this is very clear, it can be charged by any of the three, but whatever is done must include the entire sum. If one of the parties pays it in cash, the whole sum must be paid, it can not be divided up. You can’t pay half and pay half, it’s all one way or the other.
The second borrower gave an interest rate of 3,375 percent but is willing to pay the UFMIP. The move would reduce the amount of the loan down to the $193,000 base amount. See what this does, the home buyer/borrower owes less than $3,377 from day one on the front end! The lender owes less on the outstanding balance in this loan arrangement than in the first case!!!
Not only do they owe less, but the monthly payment is like that, in the first case, $853.25 instead of $854.65. On the ground, it doesn’t sound like a big deal but it is a $1.36 lower fee. The compensation interest part is smaller because the interest rate is higher so the tax deduction on a lower payment is greater! What? The first example APR using my statistics is 4.172 percent and the second example 4.324 percent. The second method’s fee is smaller, the amount returned is lower, but the APR is higher. I told you that it’s strange…
Don’t forget, from day one, the lender starts owing less than $3,377. Multiply the next million loans that times and you’re going to get a very large number. Homebuyers in America pay millions more than they need to own a home. If the borrower sells and refinances the home before paying the mortgage in full, they would potentially come out on top, a rare occurrence while borrowing money.
It should be clear to see that just as critical as the selling price is how you pay for the home. The way the loan is structured determines the total cost, not the price of the purchase.
Which needs to be done by a home buyer?
Finding the right Realtor is the first thing to do.
Have the Realtor refer you to the most respected local loan officer.
Ask a lot of questions to make an informed decision.
Work as a team with your agent and LO to reach your goal.
The best first step is to choose the correct Realtor. You know that the loan officer is going to take the time to explain your options because in the past an experienced agent has been working with more than a few LOs. It’s almost as important to help you find the right LO as finding the right house.
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