Good Faith Estimate

Mortgage loans can be confusing and intimidating for many homeowners. Terminology like APR is not only confusing, but in the case of Annual Percentage Rate is misleading. Here are the basics you need to know about Annual Percentage Rate (APR) and your mortgage rate when comparison shopping loan offers.

Annual Percentage Rate (APR)

What is the APR and can you rely on it when shopping for a mortgage loan? Banks and mortgage lenders are required to publish the Annual Percentage Rate for their loan offers. The APR is supposed to express the total cost of the loan expressed as an annual percentage rate. This sounds like a good idea; however, Truth in Lending laws do not stipulate how mortgage lenders and banks should calculate the APR or even what fees and costs should go into the calculation.

Because there is no standard for banks and lenders to use when calculating the APR it cannot be relied on when comparing offers from one lender to the next. In order to comparison shop effectively you need to compare mortgages of the same term length and type of mortgage rate. It is also a good idea to compare rate quotes issued on the same morning or afternoon due to the volatility of mortgage interest rate.

How to Comparison Shop for a Mortgage

Because the Annual Percentage Rate is not reliable, how can you compare loan offers effectively? Comparison shopping for a mortgage can be a very difficult task because you will not have an accurate picture of loan costs until you receive the HUD-1 statement prior to closing. You can use the Good Faith Estimate to compare loan offers; however, keep in mind that this document is only as good as the person preparing it is honest.

Another problem with the Good Faith Estimate is that many mortgage brokers low ball third party settlement charges to make their offers seem more attractive. They may also leave commission based markup of your mortgage interest rate off the Good Faith Estimate completely. This is why you must reconcile your Good Faith Estimate with the HUD-1 statement before closing on your new mortgage.

You can learn more about comparison shopping for a new mortgage while avoiding expensive pitfalls like the Annual Percentage Rate with a free mortgage DVD. Order yours today, the DVD is yours free with no obligation.

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If you are in the market for a mortgage to purchase your home or refinance an existing mortgage doing your homework will help you find the best mortgage for your situation. Doing your homework means researching how mortgage companies and brokers make their money and how this compensation affects your loan. The most common pitfalls result in overpaying thousands of dollars and can be easily avoided just by doing your homework before applying for a mortgage. loan Here are several tips to help you find the best mortgage loan for your situation.

Finding The Best Mortgage

Comparison shopping from a variety of mortgage offers will help you find the best mortgage. It is important to understand what you’re looking at when comparison shopping; knowing how to compare loan offers can be confusing for many homeowners. With so many different factors to consider when taking out a mortgage, how do you know which type of mortgage rate, term length or APR is best?

How to Compare Mortgage Offers

The first thing you need to know about comparing mortgage offers is that the Annual Percentage Rate (APR) will not tell you anything about the mortgage loans you are considering. Truth in Lending legislation in the United States requires lenders to publish Annual Percentage Rates for their loans; however, there is no standard method for lenders to calculate their Annual Percentage Rates including which fees they are required to include in the calculation.

If the Annual Percentage Rate is not a reliable method of comparison shopping how do you know which mortgage is better? If you discard the APR the best way to compare fees associated with each loan is by using the Good Faith Estimate and HUD-1 Statement.

Good Faith Estimate

The Good Faith Estimate (GFE) is an itemized list of all fees associated with a mortgage offer. Mortgage lenders are required to provide you with the Good Faith Estimate within 24 hours of receiving your application; however, most will give you one upon request. Remember that the Good Faith Estimate is really just an estimate; many brokers omit fees including their own markup of your mortgage rate to make their loan offers seem more attractive. This is why you should always reconcile what your mortgage broker tells you with the HUD-1 statement before closing on the loan.

You can learn more about comparison shopping for the best mortgage by registering for a free mortgage refinancing DVD.

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Very few homeowners understand how mortgage brokers are compensated for their work. As a result, nearly everyone overpays in one form or another…mortgage brokers are very similar to used car salesman. Pressure sales tactics and improper disclosure of fees and markup are common tactics employed by mortgage brokers…so much that the Secretary of Housing and Urban development was quoted saying that homeowners in the United States will overpay nearly sixteen billion dollars this year because of this abuse. Here are several tips to help you avoid being taken advantage of by understanding how mortgage brokers are compensated.

Loan Origination Fees

The first method of mortgage broker compensation that we’ll discuss today are loan origination fees. Origination fees are commonly referred to as “Origination Points.” Remember that a “point” is one percent of your mortgage amount due at closing. Origination points are different from the discount points you pay to your lender in exchange for a lower rate because this fee goes directly into your mortgage broker’s pocket.

What is a reasonable origination fee? Many homeowners are shocked to find origination fees as high as three and four percent on their Good Faith Estimate…and rightly so. A reasonable fee to pay your mortgage broker for their part in arranging your loan, regardless of a new home purchase or refinancing your existing mortgage is one percent of your loan amount. (Not a penny more)

Beware Junk Fees

Mortgage brokers are notorious for padding your Good Faith Estimate with junk fees. Application fees, processing fees, broker courier fees, rate lock fees are utter garbage that you should simply refuse to pay. Take the “rate lock fee” for example. Wholesale lenders never charge the broker a fee for locking in a mortgage rate. The fact that many brokers invent rate lock fees is ludicrous…the same thing goes for the “loan processing fee.” Many brokers claim that they use “professional loan processors” to prepare your folder for the underwriter and charge as much as $500 for the service.

If I was paid $500 an hour for printing out loan documents prepared by computer and Fedexing your file to the underwriter we wouldn’t be having this discussion today. When reviewing the Good Faith Estimate with your mortgage broker tell them that if they want your business they need to drop the junk fees and give you a fair deal.

Yield Spread Premium

The ultimate sleazy trick employed by mortgage brokers today is including Yield Spread Premium (YSP) in your mortgage interest rate. Yield Spread Premium is the markup that makes mortgage rates “retail.” Your broker qualifies you for a specific interest rate from a wholesale mortgage lender. This person will then markup up that interest rate because the lender pays them a bonus for loans closes with above market interest rates. Think your mortgage broker will tell you that they’ve done this to your mortgage rate? Think again…in fact many brokers become defensive and angry when questioned about Yield Spread Premium.

How does your mortgage broker cover up the fact that they’ve marked up your mortgage interest rate? Most brokers omit this markup from the Good Faith Estimate entirely. After all, it’s just an estimate given in “good faith.” Your broker’s not really breaking the law by leaving it off the Good Faith Estimate; however, they have no choice but to list this markup on the HUD-1 statement. The problem with the HUD-1 statement is that brokers have clever ways of justifying and disguising the markup.

What does Yield Spread Premium look like? If the markup is listed on your Good Faith Estimate it will be found around lines 810-811. You’ll notice that the HUD-1 statement looks very much like a Good Faith Estimate but will a more complete disclosure of fees. If Yield Spread Premium is present you will see it listed as YSP, Yield Spread Premium paid to broker, or some variation of Lender Paid Fees. Your mortgage broker may tell you not to worry about this fee because it’s being paid by the lender…as long as it’s not coming out of your pocket what do you care, right?

Wrong! The reason you should care and get downright angry about Yield Spread Premium is because of the reason your lender is paying the fee. Lenders pay one point (remember a point is one percent of your mortgage) for every .25% your mortgage broker overcharges you. This is in addition to the point that you’re already paying for loan origination. Because of this markup you get stuck paying hundreds of dollars in unnecessary mortgage interest and your broker walks away with double, often triple the compensation for their work.

Now the question you’re asking becomes “How Can I Avoid Paying This Ridiculous Markup of My Mortgage Interest Rate?” The answer is simple: Homeowners who learn how to recognize this unnecessary markup of their mortgage interest rate can negotiate with potential mortgage brokers to avoid paying the markup.

If you would like to learn more about taking out a mortgage without paying too much to the broker, register for this free Mortgage Refinancing Blueprint.

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Your Good Faith Estimate is a disclosure document that gives you an estimate of various fees and costs associated with your mortgage. It is important to understand that the Good Faith Estimate is simply an estimate and does not have to accurately represent your total costs and fees when taking out a mortgage loan. Many broker lowball third party settlement fees and conveniently omit their markup in order to make the loan offers appear more attractive. Here are several tips about your Good Faith Estimate in order to avoid being burned with your next mortgage loan.

The Good Faith Estimate (GFE) is an itemized estimate showing your closing costs, insurance, tax reserves, estimated payment, and other fees. It is important to understand that the GFE is just an estimate given in “Good Faith” and in the real world could come nowhere close to what you actually pay. This is why you should carefully compare what your broker puts on your Good Faith Estimate to the actual HUD statement and have a heart-to-heart discussion with your broker about any discrepancies you find. (Your HUD-1 looks very similar to a GFE)

The Good Faith Estimate is divided into several sections that you’ll want to pay close attention to.

You’ll want to pay very close attention to section 800, “Items Payable in Connection With Loan.” Don’t accept section 800 at face value…question your broker about the charges listed there. Here’s an itemized list of what you can expect to find in section 800.
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