Most people, probably all of your neighbors, approach shopping for a home loan by focusing on getting the lowest mortgage rates. The problem is that the fees you pay make or break the deal you’re getting and choosing a lender based on mortgage rates or APR results in overpaying every time. Here are several tips to help you avoid getting duped into overpaying the mortgage fees that your neighbors paid.
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The origination fee and discount points you pay are the largest part of the settlement fees you control at closing. There are junk fees that find their way into your Good Faith Estimate (GFE) like processing fees and rate lock fees that you’ll want to keep an eye out for, but the most bang for your buck comes from page 2 of the Good Faith Estimate.
Take a look at Box A items 1 and 2 on the Good Faith Estimate and you’ll find the origination fee and any discount points. Spend any amount of time shopping for mortgage or refinance rates and you’ll find that lenders quote their lowest interest rates that include discount points first.
Should You Pay Discount Points?
If you’re not familiar with how discount points work don’t sweat that part of your GFE. This fee is the third item found in box two under part A on page two. Basically you pay one percent of your home loan to lower your mortgage rates by .25%.
There is a tradeoff table on page three that shows you how lowering your settlement charges affects your mortgage rates and payment amount. The more you pay at closing in discount points, the lower your monthly payments will be. If you want to change the options quoted in the tradeoff table you’ll have to request a new Good Faith Estimate from your loan officer.
Should you pay discount points? Mortgage rates are still near historical lows even though they’ve been inching up. In most cases agreeing to pay for lower mortgage rates simply raises your out-of-pocket costs unnecessarily.
The best starting point your mortgage rate shopping is to request zero point Good Faith Estimates and pay close attention to the fees found on page two.
Your Origination Fee & Yield Spread Premium
The origination fee you pay goes to the person or company arranging your home loan. It is often split between the loan officer and the lender. Negotiating loan origination fees is difficult but not impossible. Big name lenders like Bank of America or Wells Fargo don’t always have the best deals when it comes to mortgage fees like loan origination.
I’ve reviewed small, community based credit unions offering loan origination fees as low as $400. Invest some time shopping your local lenders and you can find deals like this.
What the heck is Yield Spread Premium? This is a credit generated by accepting higher than market mortgage rates. Every now and then I get a snotty comment saying “Yield Spread Premium is illegal now, you need to do your homework!”
This is simply not true. The credit or charge for your interest rate described on page 2 of the GFE is Yield Spread Premium.
This credit is how those no-fee refinance offers you see advertised work. By accepting higher than market mortgage rates you’re generating a credit from the lender used to pay your origination fee and other closing costs. Is taking higher mortgage rates to pay your closing costs worthwhile?
If you’re strapped for cash no fee mortgage loans can close the deal but you’ll always have a higher payment than if you had paid the settlement charges yourself.
How to Pay Less Closing on Your Next Home Loan
The most important aspect of shopping for your next home loan is to start by picking a program and stick with it. Do you need an FHA home loan with a 30-year fixed mortgage rate? Make sure all of your quotes are for this program and don’t let a broker confuse you by quoting a 5/1 ARM in the mix.
Limiting your quotes to identical programs is the only way to make an apples-to-apples comparison from different lenders. Invest your time comparing mortgage rates AND the fees I’ve discussed here will get you a better deal than 90% of your neighbors.
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