A savvy home buyer needs to know more about mortgages than
the prevailing interest rate
First you decide that you’re ready for the responsibility that comes with owning a home. Then you make sure you’re financially capable of paying for what interests you. But a third step most people rarely consider is how, exactly, they will pay for it.
Sure, everyone expects they’ll be getting a mortgage. But what exactly does that mean and what is the process like?
To Brent Foster, it’s about much more than finding the lowest interest rate.
“If you call me up and ask me for a rate, I can tell you whatever you want to hear and I can make any rate happen,” says Foster, a relationship manager with First Horizon Home Loans. But that doesn’t mean you’re getting the best deal.
“I could tell you that your rate will be six-and-an-eighth and down the street you hear about five-and-a-half. And you might say, “‘Of course I’ll go with the five-and-a-half.’ But then you look at the fees their fees are $5,000 and ours are $1,000.” Which is why Foster believes that “getting a mortgage is a very personal decision” perhaps more personal than a lot of people realize.
In a typical mortgage transaction, a buyer decides on a home and then, almost as an afterthought, seeks out a lender to fund it. Often buyers will go to brokers, who seek out the best rates from a variety of banks and match an institution’s best package with a borrower.
That’s all well and good, Foster says, but it does have its downside.
“Once the transaction is done, the broker is out of the picture. And as a customer, you may not even know who the loan is going to and have never interacted with the person who is servicing the loan.”
In fact, loans are routinely and regularly sold from a lending institution to other banks, Fannie Mae or investment groups, sometimes without the borrower’s knowledge. The company with whom the borrower interacts may change quickly. But some lenders even those that sell their loans retain servicing rights on loans they originate, which entitle them to remain the face of the transaction and develop personal relationships.
For those who think of a mortgage payment as a necessary evil a mere debit on their checking account that might not mean much. But to Foster, it’s the difference between a good deal and a “who knows?” deal.
“It’s important to know who’s going to service the loan. I recommend going to a well-established company that services its own loans. It provides a different level of service,” he says.
Some borrowers don’t monitor their payments closely, but when it comes time to sell the house, to refinance or to find out key information (such as pay-off amounts or escrow status), having an actual person to talk to can make a big difference.
But the deal itself is also crucial, Foster says. His suggestion for getting the most bang for your buck? “You want to compare good-faith estimates between companies. You have too look at the details. It’ll tell you how much you are going to pay for the loan upfront.”
Good-faith estimates are forms from lenders that spell out not just the rate, but also all closing costs and points. Because the disclosures are federally mandated, looking over two or more estimates provides an apples-versus-apples comparison of what the deal will actually cost you. Foster says his company’s closing costs usually come in under $1,000, while some may charge much more.
And contrary to popular belief, fees are not always bad.
“I do not work for a fee-driven company, but sometimes they can be good,” Foster says. Occasionally, for instance, the seller agrees to pay closing costs up to particular amount say, $4,000. “Our fees are so low that the seller has a credit,” but because the money isn’t available as cash to the buyer, it goes away if no one uses it. But Foster has sometimes used the seller’s willingness to pay fees in order to get his borrower’s rate lowered with “no money out of their pocket.”
That’s because two types of points come into play in mortgages: First the origination fee that most lenders charge, and second the optional “discount points.”
Origination points are frequently 1 percent of the loan amount, but many lenders have flexibility in what to charge.
“If you don’t want to pay that origination fee you don’t have to, but the lender will increase your rate slightly” to make up for the shortfall, Foster says. “There is no magic number. It is something we have to pay but it depends how much the lender is willing to give up from his commission.” Sometimes, borrowers do half a point and split the difference.
Discount points are totally optional and are sometimes used as in the example above where the seller paid the closing costs to pull down the rate.
“If you want to pay 2 percentage points, it will reduce your rate by a certain amount” say, six-and-a-half percent to five-and-three-quarters, Foster says. The result is that you may pay more upfront costs, but lower your monthly payment over the life of the loan.
Another way to save money on any loan is simply to pay it off more quickly. Some lenders charge additional fees to make semi-weekly withdrawals of half a monthly mortgage payment which, due to the number of months in a year, ends up amounting to an extra payment every year. But you don’t need to pay your lender to do that the law entitles borrowers to add any amount they wish to decrease their principal. You can even set up direct withdrawal on a regular basis (“a few dollars every day if you want,” Foster days) another advantage to knowing your loan servicer. And another reason a mortgage is about a lot more than the rate.
M. Brent Foster, First Horizon Home Loans, 5949 Sherry Lane, Suite 1575. 214-957-2406.
This article appeared in the Dallas Voice print edition, March 2, 2006.