Well, here we are. Nearing the end of 2008, another month of ups and downs and BIG market news. Another month full of bailout propositions, political mutterings and musings, and Dow troubles. The government’s supposed plan to artificially lower mortgage rates to 4.5% is still getting some air time. It’s all very fun and exciting!
As with all things ‘fun and exciting’, there are certain new things that we all need to be aware of. Most importantly, investors are changing the way they pay us, and this in turn affects YOU. It used to be, one of us could ‘price’ a mortgage deal at one rate, let’s say 6%, and then offer a higher rate (let’s say 6.25%) with no lender fees, and then 6.5% with all closing costs paid. OR, we could offer a slightly lower rate, 5.75%, with one point charged to the borrower. The spreads between the rates were not very wide. Oftentimes, it made sense for some people to go the no-cost route, and very rarely did it make sense to pay a point.
Well, the spreads on rates are wide now. This is an unintended consequence of the fictitious 4.5% rates.
See, investors are smart savvy (sometimes). They don’t want to pay us loan officers much money if we are going to hand them a loan that’s just going to get refinanced in three months! They don’t make much money on those types of loans, so they try to avoid them. So, now, let’s say 5% is the ‘one point’ rate. What would the ‘no-point’ rate be??? Probably 5.5 or 5.75%! Such a huge difference, it’s amazing. This means to us (me, and others in the profession) that the lenders and investors don’t necessarily want to pay us very much, so they are stretching out their ‘premium’ levels. We get paid in Yield Spread Premium, Service Release Premium- Some sort of ‘premium’. To deter churning of high-profit loans on OUR end, they are paying us less. Plain and simple.
Way back when (only a month or so ago in reality), a person could get a no closing cost loan very easily. Add .5% to the rate, and have all your expenses paid by a lender credit. Very simple. Now? Impossible. You’d have to add 1-1.5% to the rate to accomplish that. Who wants to do that?
On the flip side, I am recommending to most of my borrowers that they pay points. The affect on the rate is much larger than ‘normal’ (old, .25%, NOW .5%+), so paying a point or two definitely makes sense.
Here’s a little chart as an example (all rates are illustrative ONLY):
Then: Now:
6% (2% in premium to US) 6% (2% in premium to US)
6.25% (3% in premium) 6.75% (3% in premium)
AND THE CAPPER
5.75% (1 premium/1 point from borrower ) 5% (1 premium, 1 point)
These are NOT normal times. And this is just one of the many changes we’ll be in for over the coming weeks and months.
Bottom line- don’t shop for no-closing cost loans, they are not worth it. And if you can, pay a point or two. The rewards are much greater!
Good luck out there 
Jennifer Monastero
Last 5 posts in Costs and Fees
- New Refinance Break-Even Point and Savings Graph - October 1st, 2009
- Renovation Financing: Not all loan officers are created equal! - September 23rd, 2009
- Tips & Tools for First-Time Buyers - September 17th, 2009
- Successful Short Sales…I mean plural…more than one! - September 14th, 2009
- 203K Rehab... A Diamond in the Rough! - September 10th, 2009
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- Categories: Costs and Fees, Lenders, Mortgage Broker
Comments
2 Comments so far
Sean Purcell
“The affect on the rate is much larger than ‘normal’”
I’m not sure what “normal” is, but the current spread makes quite a bit more sense to me. A client willing to put up extra assets in order to lower their rate deserves some real bang for their buck. On the other hand, a buyer so short of assets that they need help paying the closing costs is giving a strong indication that they may be buying beyond their means. The lender should charge a much higher rate to assume their true, inherent risk (as opposed to the halcyon days of perceived riskless lending and almost non-existant underwriting standards). As for rebate - I’ll leave the moral terpitude of that game to you.
Jennifer Monastero
‘Normal’ is about a .125%- .25% drop in rate for every point paid in ‘discount fee’. .25%- .625% is quite the nice change!
Also, other underwriting thresholds take care of what you mention- borrowers who don’t really have enough funds to close. If someone is buying beyond their means, then we’ll know about it. I think what many people prefer is to have as little money out of pocket as possible- they could have $20k in the bank, or $100k, and STILL not want to pay closing costs. Unfortunately, the days of being able to absorb closing costs in the rate are gone- for now.