Compare Loan Origination Fees - No Junk Fees
by John from Florida
Ask Kate how to compare mortgage loan origination fees: Say no to junk fees! Okay, I know it's popular to define junk fees as charges that do not pay for an actual service. Others claim they are surprise closing costs that remain undisclosed until final mortgage documents are ready for signing. But how about the following interest rates quoted to John, a homeowner from Florida?
John Asks Kate to Explain Lower Loan-to-Values, Larger Down Payments, Higher Mortgage Rates
Hi Kate, I wanted to put 50% down on a $100,000 loan. But the bank mortgage officer basically insisted that I put 25% down. He said that they or anyone would raise the interest rates if I were to put more down.
I said where is the sweet spot where I can get the best deal. He said that's it, 25% down.
This doesn't really make sense to me. And I could not get him to quote me the interest rate for the 50% down.
Why wouldn't the bank want 50% down in this climate with all the defaults?
I was given 3.625% (APR 3.827) for 25% down. What would the rate actually have been for 50% down and how much total cost would such a loan have saved?
Kate Answers: Lower Loan-to-Values, Larger Down Payments, Higher Mortgage Rates
Sigh. Obviously when the mortgage originator fed you this misinformation, he assumed you wouldn't question it.
It's silly to claim there isn't a mortgage company that will... (fill in the blank). How could any individual, no matter how many years in banking, possibly know the policies of e-v-e-r-y lending institution?
Plain and simple, mortgage rates, closing costs, and lending policies vary in the marketplace.
Down Payment vs Mortgage Rate Inconsistencies
Keep this in mind. Originating lenders earn more money on larger loan amounts. It's a simple matter of yield.
The secondary market that buys mortgages from originating lenders negotiates a cut-off in their contracts. Apparently it's $50,000 in the case of this lender. So a loan amount of $50,000 or less will yield a significantly smaller pay-out when the mortgage is sold. The originator in turn earns less.
But to you, it isn't making sense that a home buyer with a larger down payment which creates a lower loan-to-value (LTV) is charged higher mortgage rates. Well, it doesn't make sense! Less risk would normally be rewarded by lower interest rates!
So it's safe to assume the inferior mortgage rate is not due to the more substantial down payment and lower LTV. Rather, it's because the amount you are borrowing has fallen below a dollar threshold, an amount too low to offer an acceptable yield to the lender.
In my book, this higher mortgage rate is a junk fee!
HARP 2.0 vs Traditional Refinancing Inconsistencies
Another case where borrowers with lower loan-to-values are charged more is found with HARP 2 refinances vs a traditional refi. A HARP 3 proposal in February 2013, Responsible Homeowner Act of 2013
addresses this inconsistency for homeowners with equity.
How to Get the Best Mortgage Rates at the Least Cost
One more thing. Don't put up with a lender who will not quote mortgage rates at a certain LTV or provide Good Faith Estimates of closing costs. If you are encountering this resistance during the honeymoon stage, how will the remainder of the loan transaction go?
So what can you do about this? Shop for a new lender and request 2 Good Faith Estimates based on the different LTVs. Then you can compare the fees, mortgage rates, and long-term cost.
But first, take a few moments to continue educating yourself! How? Follow the above links to further information on my website to learn how to get your best mortgage rate at the least cost!
Here's one more helpful page... How to Reduce Mortgage Financing Costs
where you'll learn about the new kid in town, Changed Circumstance
Good luck and best wishes,
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