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Choosing between two 30 yr fixed mortgage products - help?

I'm a 1st time buyer and new to this stuff. Suppose bank 1 is offering 5.0% with 0.5% discount pts. Bank 2 really seems to want my business and states they'll match that. But when I saw their GFE they apply a kind of tricky math (common in mortgage business?) where they charge me 5.0% and 2% discount pts BUT give me a "lender's credit" at closing in the amount of $3900 (which turns out to be the equivalent of 1.5% pts). So, my out of pocket expenses seem to be identical but is there a catch? For instance, is that $3900 "gift" taxable (I have to count it as income)?

If there's no catch I'm currently leaning toward the second bank as their lender's fees differ by about $500 in favor of the 2nd bank. But I'm unfamilar with this process of charging more pts while simultaneously giving a credit. Why not charge lower pts to begin with? I get the feeling my loan officer's doing this b/c an application with 5.0%, 1/2 pt might not get accepted by this bank, but one that reads 5.0%, 2 pts will.
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February 05 2009 - Los Angeles
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Answers (17)

yes, that is a little sneaky - and the 2nd bank is trying to make you think they are giving you a deal. Why bother with it? Make them take it off rather than signing it and then go for it
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February 11 2009
Andrew,

yes, you are correct. garbage in garbage out. It calls into question training, business practices, and ethics of the lender. That doesn't negate how the effective interest rate is calculated. If it sounds too good to be true, then it probably is.
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February 11 2009
Profile picture for CORONA NICK

I would go with the LO I trust, I have to agree with those who feel the same. Go with the 1st bank, seems like they gave you a decent deal, maybe not the best, but certainly not the worst.

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February 09 2009
Bank 2 is pulling tricks, the way it is setup does not make sense. In most cases when you see something like that, it does not pan out correctly at close. Good luck
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February 09 2009
at,

BANK 2 is a piece of **** lender.. beware going there.. charge 2 to rebate this and a free blender with a purchase of a tank of gas...Nobbody does business that way... It is not the right way nor ethical.  However the marketing of GREED seems to have attracted another moth.. Is the name "FLAME MORTGAGE"?

BEWARE!!!!!!!!!
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February 09 2009
Michael,

The only problem with relying on the APR for comparison is assuming the lender/broker issueing the APR has done so accurately!  I would be willing to bet the same loan officers that will low ball a quote would have no issues lowballing closing costs making their GFE's and APR appear better than they will be at closing.

Just my .02
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February 09 2009

Sound like funny math. The loan with the lowest effective interest or Annual Percentage Rate (APR) will reflect the lowest total cost of borrowing. Closing costs are nothing more than prepaid interest. Interest is the cost of borrowing. APR includes closing costs and the interest rate. Also, ask the lender about the Yield Spread Premium. YSP is compensation the investor (who funds the loan) pays directly to the loan officer outside of closing. If the lender fails to disclose the YSP, then find another lender.

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February 09 2009
I would stick with the inital offer-  Lender 2 seems to want the business and is trying to get it but it is not worth the headache for $500-  Additionally, if they really wanted to get your business, they would lower the rate or give you the same rate with only .25% in discount-  On the GFE without going through credits.   Otherwise, not worth it.
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February 05 2009
Choose the one you trust the most. It's easy for anyone to play with the numbers. Shame on them for confusing the process for you. Good luck!
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February 05 2009
Profile picture for SoCal_Engr
Atkim,

I am not a mortgage pro, but a consumer like you. Go with the bank that offered the straight up 5% w/ .5% discount points.

1.  Anyone can play the "we'll beat them" game. If they were really interested, they would have given you their best rate up front.

2.  Over the long haul (even short haul?), $500 is not worth the risk you are taking going with a lender that is "playing games" or "using tricky math". My experience is that "tricky math" is never done in your favor - especially if there is a simpler, straightforward way to provide you a reduced cost.

3.  The first lender gave you an honest, straight up, no games offer. And, it was their best offer, right out of the gate, without making you play any "can you beat this" games. They deserve your business.
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February 05 2009
You cannot charge discount points and credit them. If they are true discount points they have to be used to reduce the rate. If they were true discount points that would indicate you are getting a below par rate and there would be nothing to credit.

Also, have you already made a commitment to one lender? $500 is nothing to put yorself through headaches for. Part of what you pay for when you choose a lender is service and peace of mind. Someone beating a rate by $500 and using fuzzy math to do it, is probably going to cost you. The cheap comes out expensive.
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February 05 2009

I would suggest doing business with Bank 1.  Bank 1 offered an initial fair offering which is a character trait of the LO.  Bank 2 tried to take advantage of you by offering extreemly high initial fees hoping to take advantage of your ignorance and is trying to backpedal to a fair offer when found out.  The LO of Bank 2 is not generally someone you want to do business with.  You have little protection against being taken advantage of again and know they are the type of person to try.  $500 difference on a mortgage is peanuts.

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February 05 2009
Kim, you probably won't remember the $500 difference a year from now. But, you surely will remember getting a raw deal with poor service!

Getting a mortgage loan shouldn' become a bidding match. That won't serve you well. Any broker that says I'll match that, please say thank you and never contact them again.

You are not purchasing a commodity. You, IMHO, are seeking integrity.  ... Pick a broker that you have checked out as being ethical. Fees and Rate will all be in your favor!. ... Best wishes.
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February 05 2009
Actually lender 2 silly math could work to your favor since points paid on a purchase are fully tax deductible whereas most other costs are not.  Instead of crediting you 3,900 lump sum, see if they could itemize the credit specifically for all OTHER closing costs (except points).

I'm at a loss for why they would have structured this way in the first place.  The only thing I can think of is the cost credit is part of a marketing program. 
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February 05 2009
If it's the same deal go with the one that is not complicating things.  Keep It Simple!
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February 05 2009
If you net .50 discount after the credit, that makes no sense at all. Ask them why the fuzzy math?
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February 05 2009
Tell bank 2 to delete the credit and 1 1/2 points.  It shouldn't make any difference to the lender 6 in one half dozen in another.  It's not tricky math it's a waste of time.
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February 05 2009
 
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