Mortgage Tips, Tricks & Secrets

It doesn’t matter whether you’re in the market to buy a new home or if you are facing foreclosure - the fundamentals are the same.

When you begin the mortgage loan “shopping” process you actually DO get the exact loan you ask for.

In fact, even with all the grim mortgage loan and refinance news floating around these days - with many home owners crying the blues about their adjustable rate mortgages. Those home owners STILL got exactly what they asked for.

Now, when I say “asked for” I don’t mean it in a cynical way - I mean it in a literal way.

As an Ex Mortgage Executive I spent years fielding phone calls from borrowers that asked the same ONE question over and over again.

“Give me your lowest interest rate”

Well guess what, the lowest interest rates are typically on adjustable rate mortgages and the ever popular pay-option-arm with it’s 1% interest rate.

Both excellent loans - IF YOU KNOW WHY AND HOW TO USE THEM!

BAD BAD LOANS IF ALL YOU WANTED WAS A LOW INTEREST RATE.

Why? You know why - because they adjust UPWARD eventually and they leave home owners perplexed as to how to get out of them. Especially when home values decline in a soft market.

If you don’t know what a soft market is, or how lower home values match up with adjustable rate mortgages then know this = you need a home value high enough to be able to refinance into a new loan. The new loan typically has to be 80% or less of the home value.

Not enough value (soft market), no room to refinance (value wise) and you are stuck with the adjustable rate mortgage. Can’t afford the higher payments and you enter foreclosure. Simple as that.

Ok, back to the point of this post…

When you ask your lender/broker for the lowest rate, you get it. It’s an ARM loan or a Pay Option loan and it adjusts at some point in the future.

Here’s a better way to approach your lender/broker and direct the conversation more specifically.

Ask for…

1. Good Faith Estimate
2. Specific Loan Product
3. Loan Product Options
4. Direct The Brokers commission

Notice, I don’t mention anything about the lowest interest rate.

Why? Because it’s driven by number 4, the brokers commission.

Here’s how;

Either you pay the brokers commission (by paying points OR pre-paid interest [line 801 of the good faith estimate) OR the lender gives the broker a rebate (called YSP [yield spread premium]) on line 824 of the good faith estimate.

Directing the brokers commission can potentially drive the interest rate up or down. Of course you can buy the rate lower (discount points) however the broker commission still needs to be charged, typically in the points (line 801) section of the good faith estimate.

For example, pay a point (1 point = 1% of the total loan amount) then the broker would not typically ALSO get a rebate from the lender shown on line 824 of the good faith estimate.

In number 4 above (Directing the brokers commission) means saying you will pay 1 point and get a lower rate OR no point and the lender pays the commission (line 824 of the GFE) by giving a slightly higher interest rate. << Read that over and over again - it's the key to most mortgage transactions.

Pay a point on line 801 and the rate will be lower. Pay no points and let the lender pay the broker with "rebate" and the rate is higher.

Most brokers won't reveal line 824 to you until closing - find another broker if that's the case. Realizing that the broker is getting a point from you and a point from the lender means you are paying twice the commission and getting a higher rate than you qualify for.

Can you split the commission between points and rebate (line 801 and line 824)??? YES, only when the broker shows (and you ask for) line 824 to be revealed.

Here’s a better question than “give me your lowest interest rate.”

Following the four steps above you would say…

I would like a (1) Good Faith Estimate on; (2) a 30 year fixed rate refinance; (3) interest only; (4) I will pay one point and please reveal line 824 on the GFE.

If you approach mortgage loan shopping with the above format in mind - you will be 100% ahead of everyone else (yes I said 100%).

The points you pay (pre-paid interest OR discount points) and the lenders rebate (YSP on line 824) drive the interest rate almost all of the time.

I didn’t say they “ALWAYS” apply but in almost all situations they do. And your mortgage broker/lender will appreciate that fact you know what you are talking about.

DO NOT - and I repeat - DO NOT approach your mortgage shopping with a cocky attitude now that you know the inside details. In a mortgage loan fight, the broker/lender always wins.

Ask for what you want by following the 1-4 format above and when the offers come in - throw out the ones who can’t follow what you ask for.

Find the offer you want - lock the interest rate (you’ll find interest rate lock info in another section of this site), and stop worrying about having your credit checked - it’s not as bad as the myths would have you believe.

In conclusion; Don’t Be A Stupid Home Owner - Learn The Fundamentals by Subscribing to Updates.