Does a mortgage broker charge the buyer thousands to get the lowest wholesale rate possible? This is a homepath so they will cover most of it. thanks.

Asked by Vitt, Northridge, CA Sat Sep 17, 2011

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Shane Milne, Mortgage Broker Or Lender, South Jordan, UT
Sat Sep 17, 2011
Simple answer is, yes, it will likely cost thousands to get the lowest possible interest rate.

You can get the "lowest rate" from a mortgage broker, a bank, a credit union, etc. A higher rate will always cost less (in fees) than a lower rate, and the fees that you pay in order to get a lower interest rate are called "points". 1 point = 1% of your loan amount (ex. 1 point on a $100k loan amount = $1k). It may also be said as "one point origination fee". Most rates you hear are quoted with 0 points, sometimes it'll be 1 point.

The concept of paying points is so you can get a lower interest rate/payment that will pay for the points over time. For example if paying 1 point on a $100k loan amount would lower the interest rate & save $25/mo in payment, the breakeven point would be 40 payments/months, and if that person was planning on having the mortgage for 10 years, they'd save a total of $3k in payments ($2k more than the 1 point they paid).

The lower you go in interest rate, the higher the cost is exponentially. For example, 3.875% may cost 0 points, 3.750% cost 3/4 point, and 3.625% costs 2 points... so buying down your interest rate from 3.875% to 3.750% may make sense, but not paying the extra 1.25 points to get it down to 3.625%.

Other than points, there are other closing costs, such as the lenders standard fees (underwriting, processing, funding), appraisal fee, title insurance & escrow costs, the 1st year of homeowners insurance, and if you are going to be paying your property taxes/homeowners insurance with your monthly payment (called an "escrow account" or "impound account") then there is an upfront amount of money needed to fund that account as well... the credit from Fannie Mae (the seller) on a HomePath property can be applied towards all of those, including points.

Part of the pre-approval process with a loan officer will be determining if you have enough money saved up in order to qualify, and to determine that you'll both go over what the down payment amount would need to be, how much the closing costs are expected to be, how much of a seller credit (if any) there would be to apply towards those costs, and how much extra (called "reserves") you would need on top of that final figure. Then with that in mind, if there are extra funds able to be used (either from the seller credit, or your own funds), those could be used to pay points to get a lower interest rate.
1 vote
Rudy McDowell, Mortgage Broker Or Lender, Bloomfield Hills, MI
Mon Sep 19, 2011
Hi, Scott. Scott answer is spot on.
0 votes
Scott Godzyk, Agent, Manchester, NH
Sun Sep 18, 2011
In a simple answer you can pay points to get a lower interest rate or pay no points and have lower closing costs but a slightly higher interest rate. A loan officer can easily print payments for both scenarios and let you know any pros or cons…

Please see my blog for mor etips and advice in getting a mortgage
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0 votes
Shane Milne, Mortgage Broker Or Lender, South Jordan, UT
Sun Sep 18, 2011
You are welcome Vitt. If you aren't already working with a loan officer you like & trust, I'd be happy to help you out.
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Shel-lee Dav…, Agent, Rolling Hills Estates, CA
Sun Sep 18, 2011
I know you asked, generally, about the cost of borrowing. I would like to point out another factor to consider. You state this is a HomePath eligible home and HomePath is a govt insured loan that is quite different from FHA or other loans.

First of all they offer a 3% down option. Unfortunately, this option is quite pricey (last time I checked you pay 2.75 pts for this loan). On the other hand, if you put 5% down, they only charge 1 pt for the loan. My clients all choose the 5% down, as it only costs them 0.25% more out of pocket, but that buys them additional 2% of equity at closing.

Second, HomePath loans have NO MI. This will not only save you up front money, but also will save you the 1.15% additional MI, charged monthly, on an FHA loan. So if you are borrowing using FHA at 4.5% interest, and paying MI, your monthly payments are the same as if you borrowed at 5.65%. This is the premium you pay for not putting 20% down. However, with HomePath, that premium is waived.

Third, HomePath does not require an appraisal. You save the $400-450 up front appraisal cost.

Fourth, HomePath will allow you to buy a home that requires some repairs, and often will spell out those repairs and their costs in a disclosure to the buyer.

Fifth, HomePath is offerng 3.5% towards closing costs through October 31, 2011. With this incentive and 5% down payment option, you will most likely have enough money from HomePath to buy down your interest rate. My last client who used HomePath was able to buy down his interest rate by 0.5% using OPM (Other Peoples/HomePath Money).

HomePath loans do generally take 45 days minimum to fund, however, the seller is Fannie Mae and knows this, so you don't get any grief for asking for the longer escrow. In fact, we asked for a 45 day escrow and they countered back with 60 days. My buyers who have purchased HomePath homes have been thrilled with the monthly cost savings they get, over FHA. If you need a good HomePath lender, please feel free to contact me directly for a referral. Dare to Dream.

Shel-lee Davis, QSC®
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RE/MAX Palos Verdes Realty
424-2HELP12 (424-243-5712)
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Vitt, Home Buyer, Northridge, CA
Sat Sep 17, 2011
Thank you Shane. I appreciate your thorough answer.
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