Let Me Tell You About The Loan You Could Have Had

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Not interested? Most people aren't when it's talking about how they got taken advantage of in the past. First off, it's in the past so it is over and done with, and there's no use dwelling on it, right? Second, there's the ego thing. Nobody who's been bragging about what a great deal they got likes to find out they've been had. Taken for a ride. Conned. Big time.

Anyone reading this who isn't interested in improving what happens next time can tune out now, because that's what the rest of this article is about: educating you in how to shop for a loan and what the tricks are, and if you've never had a real estate loan but want one someday, chances are you'll benefit from reading it to. If you're the sort of person who isn't interested in improving your future loan, chances are you're not a regular reader because helping folks understand their financial options for next time is the most consistent thing I do here.

On a very regular basis people tell me how they got taken advantage of by a loan provider. Actually, a lot of them think they're bragging about what a great deal they think they got, when in their situation, I wouldn't take that loan if the bank paid me. High points charges that stick around in the balance essentially forever. Points on hybrid ARM loans (3/1, 5/1 and 2/28 are the most common). Prepayment penalties, especially needless prepayment penalties, or prepayment penalties that last longer than the period of fixed interest rate. Fixed rate loans where hybrid ARMS are more appropriate. Long terms where a shorter term would be more in your best interest. Most loan officers are looking for an easy sale, and no loan officer ever complains that a sale was too easy to make. Failing an easy sale, they'll look for any sale. If they don't get you signed up for any loan, they don't make any money. They are not responsible for your best interest, they are responsible for making money and not stepping over legal limits which are very different (in the sense of being less restrictive to loan officers) than most members of the public believe. If ever a loan officer tells you that in your circumstances, they wouldn't refinance, make sure you get their contact information and put it someplace you will be able to find it when you go looking for your next loan.

First off, if your credit score is above about 660 and you have a prepayment penalty, chances are excellent that you were taken for a ride. People with credit scores above 660 should usually be A paper, not subprime. A paper does not need a prepayment penalty except when the loan officer wants to get paid more. A 2 year prepayment penalty is worth a good chunk of change on the secondary bond market - usually about 4% of the loan amount. This means that if you have the $270,000 loan I use as the default here, they made almost $10,000 over and above the normal price spread when they sold your loan. And even when they retain servicing rights, lenders sell loans over 95 percent of the time. At the very least, you should get some kind of benefit for accepting a prepayment penalty A paper. A current "maximum conforming" loan of $417,000 would be worth almost $17,000 more to the lender with a prepayment penalty than without. This, all by itself, is often a reason they stick folks in subprime situations. If you think you're A paper, make them show you the turn-down from the automated loan underwriting program before you even consider a subprime loan.

If your credit score is below 620, you're almost certainly stuck with a loan where you have a prepayment penalty by default. Buying it off is usually a good idea, but buying them off isn't free. Between 620 and 659, there's some wiggle room as to whether you will get an A paper loan.

But most people never undertake the three most important steps they can to get a better loan. They don't shop multiple lenders. They don't ask for a guaranteed quote. And they certainly don't sign up for a back up loan.

I've been looking for a new place to hang my license, and the one thing (other than looking for loan officers who don't understand the way the business works) that most of the firms have in common is that they don't want to compete on price. They know they may have to the first time, but they want the client that just automatically comes back to them that they can soak for two or three points on every loan, in addition to whatever they earn for the prepayment penalty. I understand this yearning very well; it's a normal human desire to want to make more for the same amount of work, and also to lock up the customer for the future. If all you think about is how easy the loan is to get, you are these firms' favorite type of client. Guess what? You may not see their extra $10,000 or $15,000 as a separate charge on any of your paperwork, but it is there and you are paying it, and someone who knows what they are looking for can find it. Most folks would never dream of paying $50 for the same toaster that everyone else is buying for $13.99 at Target, but the way loans are priced is confusing at first sight, and people don't want to sort it out. It's pretty easy, actually. Figure out what kind of loan you want and qualify for, then price the rate/cost trade-offs of that loan type amongst the various loan providers. Figure break-evens on the extra cost of the lower rate. One rule I have never encountered an exception to is that if a loan provider pushes a low payment to sell a loan, they are a crook. If they sell by interest rate, they may be worth talking to, providing the loan type is what you're looking for. If they sell by the Tradeoff between rate and cost, they're definitely worth talking to. And if someone suggests a different type, hear them out but make certain they tell you all of the details. There is always a reason why one loan is significantly cheaper than another loan

Another very common tactic used to induce your business is advertising. Remember the loan ads that went "Lost another one to (mega corporation which shall remain nameless)"? That particular mega corporation is not competitive rate-wise or underwriting wise with others. Joe ShadyBroker who earns six points on every loan can often deliver better rates than they can. What they were trying to via their advertising is create the illusion of low prices by telling you they have low prices. Then, when you call and they quote the superficially low payment due to a rate where you have to pay three points to get it, they've got the average potential client suckered. Because their payment on a 2/28 loan with a 3 year prepayment penalty where you have to pay three points to get the rate is lower than mine on a thirty year fixed with zero points, people will sign up. Why? Because it looks more attractive to them at first glance. Get the calculator and the checklist of questions and ask the questions and do the math. Nobody can take advantage of you without your consent, but those who allow themselves to be intimidated by numbers are giving their consent. Actually, with most places, it's like begging, "Oh, please, I want to pay thousands of dollars more to get a higher interest rate!"

If someone doesn't ask questions like "how long are you planning to keep it?" or "how long do you usually keep real estate loans?", especially if they just launch right in to a spiel based upon a low payment, they are a cash-sucking Vampire. They may be an intelligent vampire doing what they are doing in full cognizance of what it does to you, or they may be an innocent vampire who doesn't really understand the business and who is being controlled by a green-blooded master cash-sucking vampire, but in either case you don't want to do business with them. Yes, these are sales questions. Yes, they get you talking to a salesperson, who then has a possible opening to talk you into something that may not be in your best interest. If they don't ask the questions, I guarantee that they're trying to push you into something that isn't in your best interest. Which is better: Not talking to a salesperson and being certain of being messed with, or talking to a salesperson and possibly being messed with? Note that there is no option that says "Don't talk to a salesperson and not get messed with." If their people don't know enough to help you from their own knowledge, those salesfolk were probably intentionally hired because they didn't know any better. It is not a crime to make money. They are looking to make money, I am looking to make money, everybody in every line of business is looking to make money, including your employer - that's how they pay you. If I were independently wealthy and never needed or wanted to make money again, I certainly wouldn't be doing real estate loans, and neither would anyone else. You can take the attitude that you're going to pay a reasonable amount, and while you can take steps to hold that amount down and make certain it doesn't get outrageous, you know you're going to pay what it costs, or you can take the attitude that a cheaper quote means you'll actually get that rate at that cost when the overwhelming probability is that they're lying to get you to sign up. You need to look gift horses in the mouth. If someone's quoted fees are lower or higher than everyone else's, there is a reason. If they're too low, it's probably because they're pretending that a large percentage of what you are going to pay doesn't exist, because that gets people to sign up. Ask them if they will guarantee their total fees and the rate in writing. If the answer is no, they are lying. Actually, most of the liars won't tell you "no" in response to that question. They'll tell you some line about how they're a major corporation or how they honor their commitments or any of several other lines that mean absolutely nothing. The MLDS and Good Faith Estimate are not commitments. Major corporations pull the same games as everyone else. In fact, they usually get away with playing even worse ones than Joe ShadyBroker because of their "name recognition".

So shop around. Ask every single prospective loan provider every single question in this article. Pull out the calculator to see if it's believable, to see if the numbers work. Ask them if they'll guarantee the quote, subject to underwriting. And then go out and apply for a back-up loan as well, because even if you've got a guarantee, it's difficult to enforce, and impossible within the time frames most folks need the loan to be done.

The typical savings of being a savvy consumer is literally thousands of dollars every time you get a real estate loan. You may not see the savings directly on the HUD-1 at closing, but they will be present nonetheless. If you don't accept a prepayment penalty, that's thousands of dollars you've saved yourself down the line when you've been transferred and need to sell. If you get a rate that's a quarter of a percent lower on a $270,000 loan, that's $675 interest you are saving per year. That's a couple of car payments; perhaps enough to let you buy for cash next time you need a car. If you invest the difference over the potential lifetime of your mortgage, a difference of over $127,000! If you save yourself the two extra points of origination that they were going to charge you, that's over $5500 that either is in your pocket, and that you can invest or spend on other things, or $5500 that isn't in your mortgage balance, where you're going to pay hundreds of dollars in interest on it per year ($357.50 per year at 6.5% interest), in addition to owing the base sum.

My point is this, folks. If I were a financial advisor trying to score an extra quarter percent commission off of you, most of you would be upset. Many people are so upset by 0.25% 12b1 fees in mutual funds that they won't pay the advisor who would save them a lot more money than the 0.25% per year simply by simply reminding them of sound investment principles. If I were a car salesperson trying to pad the cost of the car you were interested in by $5500, a large percentage of the population would most likely slug me. But because real estate transactions are complex and people don't want to take the time to understand them, they unwittingly walk into situations like this, and many people do so repeatedly throughout their lives, making the same mistakes every two years. The dollar amounts are large enough that even small differences are thousands of dollars. If you're not going to guard your pocketbook, most loan providers will pick it.

Now the workman is worthy of his or her hire. The person who gets you the loan is entitled to be paid. Judge the loans on the bottom line to you; how much it costs and what you will get. The proof that they got you a better deal was that they delivered a better loan, not that they made less money. And if the person who does your loan can make an extra half-point while actually delivering you a loan that is the same rate on the same loan at less cost than the other provider, haven't they earned that money? You came out ahead because of their work - had you gone with any other loan, you would have paid more or had a higher rate. They made more. Definition of win-win. There is a loser here, by the way, but you'll never know who it was. It is the lender that the broker you didn't sign up with would have put you with. But by finding you a program you fit better, the loan officer you did sign up with got you a better deal and made more money. It happens every day, if you make the effort to look for it, and go about it in the right fashion.

Caveat Emptor

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This page contains a single entry by Dan Melson published on December 24, 2007 7:00 AM.

Legal Late Payments on Your Mortgage was the previous entry in this blog.

Buying Investment Property - An Example of the Issues is the next entry in this blog.

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