Transaction Case Study
I had been corresponding irregularly with this gentleman during his hunt. It happens he lives outside of California, and I only work inside California, so I wasn't professionally involved. However, when he sent me the email telling me how it all worked out, I thought it it would make a good case study to show how several things I write about actually happen, how to deal with them, and that even if you don't do everything I write about, you can still get quite a bit of benefit out of this. I obtained his permission to run it with identifying details removed. I'm going to break it up into more digestible blocks, and comment upon what he did right and what he could have done better, had he wanted to spend the effort.
Thought I'd drop you a note and complete the circle so to speak. We've corresponded a handful of times since about May. I'm in DELETED, sold my $200K townhouse and contracted to have a new house built. I used your site a lot to come up to speed on mortgage matters, I've only had 1 mortgage in my life which was for the townhouse 8 or 9 years ago. That one was an FHA ARM I assumed so this new one was a new deal entirely for me.
Research is always good. That puts him ahead of at least 90% of everybody, right there.
We signed the contract to build around May 1 and closed on a nice shiny new 3,100 square foot, 5 bedroom house on a .31 acre lot on October 1. It's been a wild month what with moving and all but we're now firmly in and very happy with the new digs. Mortgage wise we went with the builders affiliated lender, it's a moderately large regional builder not one of the publicly traded ones. I would have liked to have had the opportunity to shop around a lot but the way they write these contracts makes their lender pretty enticing with a $15K credit towards closing costs.
A $15k credit towards closing costs? On a $200,000 loan? Real is $3000-3500, plus whatever you decide to pay in points. That's about 6 points of buying the rate down. And 6.125, what he ended up with, is available in my neck of the woods for less than a point. Rates are down from where they were in the summer, but even then, I think 1.2 points was as high as I got for that rate. Real, effective savings for using the builder's lender: about $6000. Not exactly chicken feed, and at least it was a net savings. All too often, people let cash make them stupid about real estate, and this is one of the biggies. We didn't cover whether the builder's loan had a pre-payment penalty, but the builder's loan having a prepayment penalty would have eaten all those savings and more, besides.
A better way to handle it is as a direct credit on the sales price of the house. Of course, you need to have already negotiated your best bargain before you bite off on that, or they'll give you $15,000 with one hand, while taking $20,000 away with the other.
So here is how it all worked out. Initially we got a GFE from the lender which is of course worthless at the start since you can't lock a rate 4 months ahead of time. The initial GFE was for 5.875%, 30 year fixed with a single point origination fee. Then over the summer the whole subprime mess hit the mortgage market hard. My loan was never going to be a problem with a loan amount of $215K against a purchase price of $430K but we were sweating bullets over the rate for a while
. I got my initial firm rate lock the last few days of July at 6.5% with the same 1 point and 30 year fixed term. That was just under 75 days from the initial closing date of 10/8, I believe (you'd know ;)) the 75 day locks are a little more expensive than the shorter term ones. This lender lets you lock at the first opportunity and for my loan type that was 75 days, then they'll let you re-lock once between then and closing at no extra charge. I watched the rates every day and I was subscribed to DELETED daily rate alert so I could see the daily trends as the bond market did all sorts of gyrations up and down .
The longer the lock is for, the more expensive it is, yes. That said, for A paper loans, it's not very difficult to lock for up to 270 days out. On the other hand, for longer locks, you're likely to make a non-refundable deposit.
This is describing the "float down" option that lenders have, and which may or may not be included with a lock at a direct lender - their way of luring in customers, and that's fine. Broker clients don't get this (at least I've never heard of a broker who could offer it), but brokers can pull the loan and resubmit elsewhere, no matter how much lenders try to stop the practice (It's so rare that ways they try don't do much good). What they're doing with the float down is getting people committed without having them feel committed. Unless you're working a back up loan that's going to be ready at the same time, you're committed. Here's the proof of that pudding: What happens if they completely hose you on the loan? Who else is going to parachute drop in with another loan ready to sign? Answer: Nobody. Therefore, you're committed to that lender.
My closing date got moved up to 10/1 at some point and then we got to September. On 9/7 (I think this was the week) which was a Friday bonds had had a rally that week anticipating fed action. The DELETED rate had dropped from 6.5 to 6.375 to 6.25, I checked with my Broker and he offered 6 & 1/8. I held off till Monday since the bonds had rallied even more on Friday thinking it might drop a smidge more. No dice, Monday had the same 6.125 so I re-locked at that rate, 1 origination point and 30 year fixed - or so I thought.
If he's working for the broker, he wouldn't be working for the developer. He might be a loan officer, but he's not a broker. I've never made $15k on a single loan - ever. My company has never made half that amount, even on loans several times the size and apparent difficulty. That builder is not offering you $15k of incentives to use his lender if they're only making a couple thousand that a broker would from that loan. That builder is getting the direct lender's stroke from selling that loan on the secondary market.
That said, this is pretty good work on the lock.
Now, at every turn in this process I'd see other options. Initially he asked me if I had any interest in interest only, "certainly not" was my reply. Each time I receive a GFE there were blocks for the interest only option. I know in the past they've done A LOT of interest only 5 year fixed period loans. But I wanted a 30 year fixed, the rates are hardly any different these days and I do want to actually payoff my loan eventually! :-)
Oh, you will pay off your loan eventually. That's one feature all loans have. Lenders use interest only to make the payments seem a little more affordable. Of course, when the interest only period expires, your loan amortizes over a shorter period, and the payments are even less affordable than they would have been.
Unless you can afford the property with a fully amortized, you're well advised not to buy it with an interest only. They always bump the rate for interest only, and usually it's grounds for a loan originator to make a little more money, or at least try to. Even if you can afford the fully amortized payment when it does adjust, only go interest only if you have a plan that's going to make you more money than it costs you.
So closing day arrives. We trundle over to the brokers office and meet the person from the title company who is serving as the closer. She begins reviewing docs, might have been the first piece of paper of maybe the second - "and here is your note, 6.5% rate with interest only for 5 years" Wait, STOP - that isn't my loan, my loan is a 30 yr 6.125 rate!!! So she calls the broker and they look it over . Oh, so sorry, someone dropped the ball and drew up the papers incorrectly. It took them an hour to redraw the entire package up the way it should have been in the first place. The broker was very apologetic and did offer, without me asking, to waive their document processing fee which was a few hundred bucks. All's well that ends well but it makes you wonder. The loan they prepared in error had the slightly higher rate and no origination point so the costs were a couple thousand less for the higher rate. So I don't think they were trying to screw me totally but the fact remains it was a totally different loan from what we had discussed all along.
6.5%, even interest only, on a 5/1 would have made them something like 2.2 points of yield spread, had they been a broker. It makes a difference of something between 3 and 4% of the loan amount on the secondary market. That's why no origination on that loan. If you had signed those papers, they would have sent out for caviar! That and of course, the fact that they were giving you a $15,000 allowance which you weren't close to using all of. That said, always judge and compare loans by what is best for you. If someone can make more money while delivering me a loan with a better bottom line, they've earned every penny of whatever they make. Lender compensation is not something for consumers to worry about.
This is very good, that you caught the difference and stood your ground, however. Yes, your signing agent made it easy on you, but you still did it. People don't believe this really happens, but it happens all the time, and over fifty percent of all people it happens to do not notice, and of those, something like 85% won't stand their ground.
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