Mortgage Loans - secret methods that drive up the cost of your home purchase or refinance (4)

Real Costs of a Loan through a Mortgage Broker

Now we'll give you an idea of how the mortgage broker makes his/her money from a deal. Pay close attention and you will see that there are many ways to skim off the top of a deal. The following are the Real Costs (costs that every loan has and which the broker makes no money on):

• Appraisal
• Title fees: title insurance, recording fees, title paperwork preparation
• A processing fee (cost of hiring employees to process the loan)
• Mortgage insurance (for loans over 80% of the property's worth)
• pre-paid interest
• Credit report fees
• inspection fees (generally termite inspection)

(For a more detailed description of these costs, see our detailed cost section.)

*Gasp*. Yes, that's it. The rest of the fees are split by the mortgage broker and the loan officer. No, I didn't forget about the origination fee.

Mortgage brokers "buy" loans from a bank and "sell" them to customers. Every bank has a "par" rate-- a mortgage rate at which the broker does not have to pay a fee in order to "buy" the loan. An interest rate lower than the par rate would cost the broker money; an interest rate higher than the par rate would pay the broker a commission.

Following so far? If a mortgage broker gave you a loan at the par rate, and only charged you appraisal, processing fee, title and credit report fees, he or she wouldn't make a dime from the deal. Remember, a broker collects no interest from the loan, or the servicing fees. The broker only collects a commissions from the mortgage which actually lends the consumer the money.

Some brokers have limitation on how much a loan officer can charge in fees-- the loan application fee, the origination fee and the points. However, most brokers split the profit earned from every loan with the loan officer. Can you see how it is in the interest of a loan officer to charge you more points and fees? It's money in their pocket.

Of course, the brokers should be paid something for their services. The "normal fees" in the industry are an origination fee (1 point) plus one additional point. What's a point? A point is 1% of the total loan amount. For example, one point on a loan amount of $50,000 is $500 dollars.

The terms of a loan when dealing with a mortgage broker are very flexible. To illustrate this point: Don't want to/can't pay a lot of loan fees? Will it keep you from getting your loan? As a solution, the broker can raise the interest rate on your loan. How does this help? If the loan officer sells you a loan above the par interest rate (the interest rate at which a loan costs nothing and pays the broker no fees), he will receive a commission from the bank selling him the loan. He still gets his money and you pay no loan fees. You will, however be paying these points in the form of extra interest for the life of the loan, which is much more expensive than paying the points up front at closing.

Okay. You can pay a higher interest rate in lieu of points on your mortgage if you can't afford the up-front costs at closing.

In the reverse situation, if you wanted a loan at an interest rate which was lower than the par rate, the bank selling the loan charges the broker extra money for it, a cost he/she passes on to you in the form of points. You will pay higher costs up-front at closing and less over the life of the loan due to a lower interest rate.

When a broker receives points from the bank for charging a higher interest than the par rate, this is called getting points on the backside.

The reverse situation is paying extra points for a lower interest rate. This is called buying down the interest rate.

What if you suspect that your loan officer jacked up your interest rate to get more commission (he received points on the back) and didn't tell you about it? It does happen.

Ask him or her. If you're not satisfied with the answer you can always figure out how much "extra" money the broker received by looking at your closing statement from the title company. Your title officer will gladly point it out. However, at this stage of the game, you're usually signing loan documents and it's too late to do anything about it short of cancelling the deal. If you notice your mortgage company is getting three points on the back (meaning the interest rate you're getting is much higher than the par rate) you can always walk out on the deal. Some loan officers count on the fact that the moving van containing all your worldly possessions is parked outside and you won't do that.

Fees to watch out for

• Points
  Keep in mind, some brokers won't let their loan officers charge less than one point origination plus one point (known in the industry as one and one). But some do. ALWAYS shop around, especially if you have A credit. Some loan officers will charge you less if they know your loan will be a piece of cake to put through the system.

• Application fees
  Application fees are non-refundable and they are 100% pure profit for the mortgage broker. Walk out if they ask for an application fee up front.

  The only exception to this rule: if you have tough credit. In this case, the loan officer will have to do a lot of work before they can tell if your loan will go through. Time is money and they want to be paid for this effort. If your loan gets denied without an application fee up front, the loan officer put in a lot of hours for nothing.

Mortgage Loans - secret methods that drive up the cost of your home purchase or refinance (3)

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The coming legislation?

The Washington Post stated in an article titled Mortgage Brokers Likely to Disclose Fees Under New U.S. Guidelines (Oct 13, 2001) that "An estimated 150 class-action suits are now pending in federal courts around the country pitting groups of borrowers against lenders who paid yield-spread fees to brokers". If plaintiffs, numbering 30,000 in one lawsuit alone, are victorious, the the potential settlement cost is quoted by the Post to be $135 million. Naturally, as such costs could put a good percentage lenders out of business, many are asking for better clarification by Housing and Urban Development (HUD) as protection.

HUD is in the process of recommending new legislation governing the home-buying process. In a press release issued on October 15, 2001, HUD's Housing Secretary Mel Martinez stated some of the key goals of the new legislation:

• Full, upfront disclosure of all costs associated with obtaining a home loan in understandable terms prior to the payment of non-refundable fees. Full disclosure would be a description of the specific services to be performed by the broker, a statement of whether the broker is acting as an agent for the borrower, and the amount of the total compensation to the broker, including any yield spread premium paid by a lender. In addition, HUD believes that the broker should explain the various loan options. The borrower should be informed that he or she may pay higher upfront costs for a mortgage with a lower interest rate, or conversely pay a higher interest rate in return for lower upfront costs. In the latter case, the broker may be receiving a yield spread premium.

• Clarification of Yield Spread Premiums - payments made by lenders for loans with higher interest rates. HUD's statement of policy says that yield spread premiums are legal if the broker actually performs services for the homebuyer, and if the total compensation the broker receives is reasonably related to the total value of the services the broker performs. Disclosure is especially important when borrowers may be paying yield spread premiums. Borrowers should know as early as possible what their settlement costs will be, so that they can shop for the best option.

• Clarification of current HUD policy that states that consumer payments are not legal if they are overcharges, or if no service is provided. HUD is restating and clarifying its policy that excessive and unreasonable fees are illegal under RESPA because they are unreasonable and not a payment for a bona fide service.

  The new policy will make clear that it is illegal for a settlement service provider to mark-up fees when it is making a payment to another settlement service provider, unless it provides additional value to the homebuyer in the process, or when a provider does no work for the fee and charges an unreasonable amount.

• Expansion of RESPA enforcement. Last year, HUD fielded more than 900 RESPA-related complaints, approximately one-third involving kickbacks and other questionable payments.
  

Currently, these measure are not enforceable by law, and are just guidelines. You can do your part and lobby your local government representative.

Mortgage Loans - secret methods that drive up the cost of your home purchase or refinance (2)

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Getting Points on the Back

Also known as "yield-spread fees", points on the back are one of the ways a loan officer makes more funds available to the total loan "kitty." It is essentially a "kick-back" from the mortgage bank the loan officer is buying the loan from, earned by selling a customer a loan at an interest rate that is above the going rate.

Each day, loan officers receive rates from banks for all of their loan programs. Listed for each program is the "par interest rate." The par interest rate is the interest rate at which the broker does not have to pay a fee to "buy" the loan and then sell it to you, nor does he receive a commission for selling you the loan at this rate. You might say that the par rate is "loan equilibrium." Table 3 shows an example of the types of rates a bank might publish to their subscribing mortgage companies every day.

EXAMPLE RATE SHEET ON A 30-YEAR LOAN

	6.5	6.75	7.0	7.25	7.5
15-day Lock	.50	.25	0.00	(.5)	(1.5)
30-day Lock	.75	.50	.25	0.00	(.25)
45-day Lock	1.50	.75	.50	.25	0.00
60-day Lock	2.50	1.00	.75	.50	.25

In the above example, the "par" value for a 15-day lock is 7.0%. The numbers in parentheses are the points returned to the loan proceeds as additional funds to offset the costs of the loan (or as a commission for loan officer). Why would anyone knowingly pay this higher rate? To get a "no-cost loan," which I will talk about next.

For example, if you wanted a $150,000.00 loan, but didn't have enough to cover the loan costs, you could bump up your interest rate to 7.5%, giving you: $150,000.00 x 1.5%/100 = $2,250.00.

This money will be credited to the loan proceeds at closing. What does this mean? It means that if your closing costs are $2,250.00, you won't have to lay out a dime to do the loan. Keep in mind, though, that if you are purchasing a home, you can't just up the interest rate to get your down payment. You must have enough money for the down payment.

And if you didn't know that the rate you were getting was higher than the par rate (meaning you paid full loan costs)? The loan officer gets that $2,250.00. Do some loan officers "forget" to tell you about this little loan surplus? Unfortunately, yes; it is one of the most profitable methods used by loan officers.

No-cost Loans

You've heard of those no-cost refinance loans? Forget it. There is no such thing. A broker must make money on every loan. Many well-intentioned loan officers honestly believe they are giving you a loan for free, but this simply is not the case.

In the example above, I showed you how you could get a loan at an interest rate above the par rate and get points on the back. The points on the back translate to extra funds available to pay the cost of the loan plus pay the loan officer a commission. So what's wrong with this? Nothing, but you are financing the "free cost" of the loan over the term of the loan (usually 30 years), which can double or triple the closing costs (by way of additional interest) as compared to pay the closing costs in cash.

How Do You Know if the Loan Officer is Jacking up Your Interest Rate?

It bears repeating that it is the loan officer who picks the interest rate he is going to sell you and, consequently, the commissions he will earn on the loan. If he is competing with another loan company to get your loan, he may not be greedy and not jack up the rate. But if you don't shop around, don't trust him to be honest. Some loan officers are completely up-front with you, but some aren't. Always shop around, especially if you have "A" credit. Some loan officers will charge you less if they know your loan will be a piece of cake to put through the system.

Take extra caution if you have less than stellar credit and must get a non-conforming loan, as these are typically the biggest target of shady loan officers. Desperate people have been known to have swallowed higher interest rates and 5 points in fees. This definitely is gouging.

contd...

Mortgage Loans - secret methods that drive up the cost of your home purchase or refinance.

There are an enormous amount of fees associated with doing a loan. Most of them are fees that the loan officer and mortgage company cannot control, and are a part of every loan. In the case of the rest of the loan fees, the loan officer is in complete control of how much they will make off of a loan. Unfortunately, the typical consumer is unaware of these costs because they are hidden (legally so) in the loan paperwork and closing documents. However, laws are in the process of being drafted to correct this outright thievery.

In order to understand how a mortgage company makes money on a loan, you first need to understand which of these costs are profitable for the mortgage company. You can read our article on the real costs of doing a loan.

Fees Which Profit the Mortgage Company

The following fees determine the profit on the loan. They are completely under the control of the loan officer or mortgage broker. There is no standard for these fees; the unscrupulous loan officer will try and make as much as possible from you with these fees. After being in the loan business, I watched loan officers gouging their clients every day. It is a rampant, common occurrence. Most loan officers are not paid a salary, they are paid through commissions from every loan they originate that closes. This puts the pressure on them to make as much money as possible, wherever possible. Loan officers typically split the profits (usually 50/50) for each loan with the company for which they work. Therefore, every dollar they can squeeze out of you is 50 cents into their pocket. To originate a loan, the loan officer merely gets a client to fill out a loan application.

• Origination or Application Fees: These are fees for processing the mortgage application and may be a flat fee or a percentage of the mortgage. They usually are equal to one point. In fact, they are just a point called by a fancy name so the loan officer can charge more for the loan.
  
• Points: A point is equal to 1% of the amount borrowed. For example, one point on a loan amount of $50,000.00 is $500.00 dollars. Points can be payable when the loan is approved (before closing) or at closing. For FHA and VA mortgages, the seller-not the buyer-must pay the points. Even if you are not using an FHA or VA mortgage, you may want to negotiate points in the purchase offer. Some lenders will let you finance points, adding this cost to the mortgage, which will increase your interest costs. If you pay the points up front, they are deductible from your income taxes in the year they are paid. Different deductibility rules apply to second homes.
  
• Application Fees: Application fees are non-refundable and 100% pure profit for the mortgage broker. Walk out if they ask for an application fee up front. The only exception to this rule is if you have tough credit. In this case, the loan officer will have to do a lot of work before he can tell if your loan will go through. Time is money and he will want to be paid for this effort. If your loan gets denied without an application fee up front, the loan officer has put in a lot of hours for nothing.
  
• Points "On the Back": These are fees and commissions earned by the mortgage broker by selling you a loan whose interest rate is above the going rate. More about this later in this chapter.

The "normal fees" in the industry are an origination fee (1 "point") plus one additional point. Some brokers have a limit on how much a loan officer can charge in fees-the loan application fee, the origination fee, and the points, but not all. However, there is no absolute hard and fast rules.

...contd.

UK Mortgages -- An Overview

Carrie Reeder

UK mortgages are funded solely by banks, credit unions, or other financial organizations. There is no market intervention by government entities. This means that the mortgage market in the UK is very competitive. This had led to a variety of types of mortgages available to UK borrowers.

Most UK mortgages operate on a variable interest rate. This rate is usually determined by the Bank of England. However, because the market is so competitive, lenders often offer the borrower terms when they can pay a rate that differs from the variable rate. Lenders sometimes offer borrowers a fixed interest rate for a certain period of time before they will have to start paying the variable rate. Another common incentive is a discount rate. A discount rate is a rate that is lower than the variable rate. Discount rates apply for a certain number of years established by the lender. Some lenders offer capped rates. This is the maximum interest rate that the borrower would be required to pay at any time during the term of the loan.

Some lenders even offer a cash-back incentive. Cash-back incentives are based on a percentage of the principal borrowed amount. Borrowers who borrowed $100,000 with a 5% cash back incentive would receive $5000 in cash at the closing of the mortgage.

Because of the need for lenders in the UK to offer competitive rates, they usually have pre-payment penalties. This means that the borrower would be charged a certain dollar amount if they were to pay the mortgage off prior to the end of the loan term.

Another common UK mortgage is a self-certification mortgage. A self-cert mortgage is for people who are self-employed with no means of proving their income. As long as the borrower has a down payment and borrows an amount substantially lower than the value of the home, a lender will offer them a self-cert mortgage. Self-cert mortgages usually have higher interest rates than normal mortgages because of the amount of risk involved for the lender.

Other lenders allow certain borrowers to borrow the full amount of the value of their home. This usually presents a significant risk to the lender should the borrower default on the loan, so 100% mortgages are usually reserved for borrowers with great credit histories.

If you would like a list of lenders that deal with UK Mortgage Loans, let ABC Loan Guide provide you with free information. We also have links to help you find a Low Home Mortgage Rate on your next loan.

Tips On Finding A Good Mortgage Loan In The Uk

Many mortgage loans UK are easy to find. However, not all of them may suit your needs, as there are several factors to be considered when applying for one of those loans available on the fiscal market today. These brief tips intend to aid you in the process of deciding which one of those mortgage loans suits your needs the best.

Consumer Tip:

Before you commence filling out loan applications, check your credit rating. If there are any problems with your credit, you can take a little time to fix them before you start checking out e-mortgages.

Tip number one: Keep in mind that there are several mortgage lenders out there, and each one of these loans providers may offer unique deals.

Be sure to check and compare sufficient lenders before you select one of them, as disparate useful mortgage conditions may represent a significant quantity of lolly on the long term.

For instance, you may find a lot of financiers offering very low initial rates, but hiding high additional costs within the small print. Ask the financier to explain all additional costs, variable rates and remittance conditions, do not only peruse the small print yourself. If you have doubts even after being explained on these important subjects, or if you have a feeling that this particular lender is hiding something from you, just go away and continue looking for more convenient loans.

Tip number two: If you live on a fixed income, it makes sense to select one of the fixed interest rate loans

However, fixed rate loans often comes with higher penalty costs, so if there is a good chance that you will repay the loan before the end of the agreed mortgage term, perhaps considering a mortgage loan that has a variable interest rate but has lower redemption penalties is a much smarter choice.

You should also be aware of the penalties applied when extending the duration of the loan, in case you need additional payback time.

Consumer Tip:

Use the world-wide-web to your advantage. The main reason that the world-wide-web exists is for you to find the information that you are looking for, when you need it. Learn all that there is to know about item options which are available for you through disparate sellers. This will give you a good idea of where you should apply for these types of products. It is one of the best ways to learn more about product cost-price options.

Tip number three: Consider using a mortgage broker.

Although a intermediary will require you to pay for his services, it is wiser to let someone who is experienced in loans handle the process of looking for the best deal for you.

Explain your specific needs to him, and let him find the best loans for you. However, be aware that some mortgage lenders will pay some brokers to be recommended; so it is better to make sure that you are using an independent broker to get you the maximum convenient loans available in the market.

Tip number four: Try to keep the duration of the loan as brief as you can.

If the agreed payback term is too long, you will be paying a lot more lolly in interest, thus the total remittance will be higher. Ask many comfortable mortgage helpful loans businesses for quotes and compare both the four-weekly outgoings (to see if they fit your budget) and the total remittance at the end of the professional loan duration (to get a genuine idea of which deal suits you best).

I hope these four brief hints assist you find the best comfortable mortgage helpful loans saving you many headaches in the future.

"Looking for the best UK mortgages?"

Shop around.

Get quotes from 4 lenders. You may be able to save yourself thousands of pounds by avoiding UK mortgages with high rates and/or high fees. A 0.5% lower rate on a £100,000 loan for 5 years will save you over £1,300 in payments. Try your local bank or credit union, mortgage brokers and internet resources. Don't choose lenders just because they have the lowest rate. Consider the overall cost of your loan.

A mortgage or loan varies according to:

• The amount borrowed;
• The interest rate;
• The type of rate (fixed or variable);
• The term (length in years) of the loan;
• Discount rate for X number of years;
• Deposit (downpayment);
• Associated fees (broker, origination, prepayment etc.);
• Local or national taxes;
• Insurance required by the lender.

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Consider the following advice from the U.S. Department of Housing and Urban Development when applying for a loan:

• Be sure to read and understand everything before you sign.
• Refuse to sign any blank documents.
• Do not buy property for someone else.
• Do not overstate your income.
• Do not overstate how long you have been employed.
• Do not overstate your assets.
• Accurately report your debts.
• Do not change your income tax returns for any reason.
• Tell the whole truth about gifts.
• Do not list fake co-borrowers on your loan application.
• Be truthful about your credit problems, past and present.
• Be honest about your intention to occupy the house.
• Do not provide false supporting documents.
  

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Get a written (emailed of faxed) Good-Faith Estimate. Allow for a reasonable time; 1-2 hours. If they can't do that you may want to question using them. The market can change in minutes. Get a written good-faith estimate of closing costs. A Good-Faith Estimate should show you all of the costs of your loan, including the rate. The cost of a UK mortgages, however, cannot be your only criterion. Is your lender a bank or just a broker? Do they fund the loan for you, or do they rely on others to fund your closing? This can be a very important distinction.

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Do a budget. Make sure you use realistic figures. Keep all of your receipts, or keep a record, for all of the money that you spend for a month. Use that to help you compile the first draft.

Be prepared to review and update it regularly. A coordinated budget allows you to get the most home for your money without beggaring yourself, while getting rid of wasteful spending.

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When interest rates fall: Try and leave your repayments the same as prior to the rate drop. This means you will actually be paying more than the minimum each month. You'll repay your UK mortgages years sooner.

The more rates fall, the sooner you will repay your loan. You will have been paying at the higher rate, so if rates rise again later you may not have to change your repayment.

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Don' t churn your UK mortgages loan. Each time you refinance you'll likely incur closing costs and non-refundable fees. Don't let a lender talk you into rewriting your mortgage just to get a little cash back.

Many people find that they have added £6,500 or more to their debt in order to obtain £3,500 in cash. An example of this is second mortgage loans.

Consumer Tip:

Compare companies. Making sure that you do this before you decide to go with a particular vender is very important. You should also find out what each type of payment option for your product, whether it is a loan, grant, credit card or cash purchase, entails before you decide to apply for it. This will help prevent you from getting involved in something that you do not want to be involved in. Comparing premiums, interest rates and what each type of option entails is very important when comparing marketers.