The Dirty Little Secret Of The Mortgage Business (or What Your Loan Officer Doesn't Want You To Know)

Like most industries the mortgage industry has some secrets that cause unsuspecting consumers to make very expensive mistakes.  In the case of the mortgage industry, that secret is how mortgages are priced and mortgage providers compensated.  Many members of the mortgage industry have gone to great lengths to conceal from consumers how much they make on a loan and who pays it.

If you had any idea how much our competitors were making on your loan, and more importantly how much extra you are paying so they can make it, presumably you would have to be crazy to do business with them.  If you were wondering why we are taking the time to educate you about it, presumably you aren't wondering now.  An educated client is a Dream Home Funding client.

Mortgage companies make money two ways; fees charged to their customers at closing, and money received when the loan is sold and/or interest payments are received over the life of the loan.

Unlike some of our competitors who claim they are doing your loan for free (when in fact they are going to receive 3-4% when they sell your mortgage or get extra interest every month for the life of your loan), Dream Home Funding isn't embarrased to tell you that we make $3,000.00 on every loan we close.  We work hard and long to make your transaction as smooth as possible, and to save you as much money as possible, and we are very good at what we do, therefore, we aren't embarrassed that we get paid for it.  If you let us do our job, we will actually save you more money than you are paying us.

Our competitors (and even some Realtors) try to sway clients from using us because of our "high fees."  If you hear this, you should run because the person making the statement is either ignorant or worse a crook.  Why would you want to deal with somebody on perhaps the biggest purchase you will ever make who is either clueless or worse deliberately trying to steer you down the wrong path?  If you run into this, we will be happy to refer you to knowledgeable professionals who will assist you instead of harming you.

When shopping for a loan you cannot just look at the closing costs, you also need to look at the interest rate.  If you are getting a $250,000.00 loan Dream Home Funding is basically charging you 1.2% in fees, our competitors charge 0-1%.  However, our competitors are also charging you an extra 0.375-1.0% or more in interest EVERY YEAR!  Which is smarter, to pay an extra 0.2% once, or an extra 0.375% every year?  If you'd rather pay it every year instead of once, let me know and I will be happy to set you up.

Since we are not trying to hide our compensation, we can offer you 3 options for paying us, instead of the one option our competitors offer.

The first option is to pay us in cash yourself.  This is the best option if you have the money, and you plan on keeping the loan for approximately 8-10 years or more. 

The second option is to finance the closing costs.  You do this by having the seller pay your closing costs or adding them to your loan amount if you are refinancing.  Basically, if the seller was willing to sell you the house for $97,000.00 you increase the sales price to $100,000.00 with the seller agreeing to pay $3,000.00 in closing costs in the contract.  The house must appraise for the higher amount for this to work.  This is the next best option if you will own the house for more than 4.33 years.

Finally, you can do what our competitors force you to do, which is to have the lender pay your closing costs.  In return the lender charges you a much higher interest rate.  Dream Home Funding makes $3,000.00 on a loan instead of the 3-4% our competitors make, so we do not have to mark up your interest rate near as much as our competitors to make the deal work.  However, this final option is usually best only if you plan on selling, paying off, or refinancing in the first 8-10 years of the loan.

When we price your loan we work off a rate sheet that looks something like this:

Rate

15 Day

30 Day

45 Day

5.625

99.250

99.125

98.875

5.750

99.875

99.750

99.500

5.875

100.500

100.375

100.125

6.000

100.750

100.625

100.375

6.125

101.250

101.125

100.875

6.250

101.625

101.500

101.250

6.375

102.000

101.875

101.625

6.500

102.500

102.375

102.125

6.625

102.875

102.750

102.500

6.750

103.125

103.000

102.750

6.875

103.375

103.250

103.000

7.000

103.500

103.375

103.125

The column on the left lists all the rates available for that particular loan product at that time.  Rates can change several times a day, so if you are shopping it is important to check rates with all lenders at about the same time. 

Also, make sure you are getting quotes for the same product.  We have quoted borrowers a rate on a 30 year fixed rate mortgage while our competitors matched our rate, but on a 5-year balloon note.  Our rate would have been much lower on the balloon note product. 

In general taking our quote to a competitor and asking them to match or beat it is a waste of time.  First of all, if you already have the quote why spend more of your time trying to get someone else to give you the same thing you already have?  In our experience they are either going to tell you to get lost, or find a way to match it, but with a loan product that is not comparable, so they can make their usual obscene amount on your loan.  They are not going to actually beat the quote, because if they did they would be making so little that it wouldn't be worth spending their time on it.

The other columns list the pricing for different rate lock lengths.  In this example, pricing is listed for 15 day, 30 day, and 45 day locks.  The pricing is displayed as a percentage of the loan amount that the lender will pay for a loan priced at that rate when it closes within the specified number of days. 

For instance, if you locked a $100,000.00 loan for 30 days at 6.75%, when the loan closed the lender would pay $103,000.00 for it.  $100,000.00 of that goes to pay for your new home or to payoff your previous mortgage in the case of a refi.  The mortgage company gets to keep the other $3,000.00. 

Dream Home Funding normally prices its loans as close to par (100.000) as possible without going under par, which would require points to be paid.  In this case a 30 day lock would be priced at 5.875%, so in addition to our standard fees we would make an additional 0.375% which we would credit to your fees.  Our competitors price their loans anywhere from 6.375% with a 1% origination fee (total compensation of 2.875%) to 6.875% with no origination fee (total compensation of 3.250%).

What does all that mean to you?  The difference between 5.875% and 6.375% may not sound like much, but as you will see it can be quite significant.  In the first example below we will look at a scenario where the borrower sells or refinances after only 2 years.  The DHF options correspond with those described above (Option 1 pay costs out of your pocket, Option 2 finance costs, Option 3 lender paid costs).

Loan Option

DHF Opt 1

DHF Opt 2

DHF Opt 3

Comp. #1

Comp #2

Loan Amount

$97,000.00

$100,000.00

$97,000.00

$97,000.00

$97,000.00

Fees Paid At Closing

$3,000.00

$0.00

$0.00

$2,450.00

$1,480.00

Interest Rate

5.875%

5.875%

6.750%

6.375%

6.875%

Monthly Payment

$573.79

$591.54

$629.14

$605.15

$637.22

Total Payments

$13,770.96

$14,196.96

$15,099.36

$14,523.60

$15,293.28

Loan Payoff

$94,487.94

$97,410.20

$94,860.47

$94,706.90

$94,909.78

Total Cost

$111,258.90

$111,607.16

$109,959.83

$111,680.50

$111,683.06

The first thing you should notice is that every option Dream Home Funding offers is less expensive than what you can get from one of our competitors.  The next thing that becomes obvious is that it is much less expensive to let the lender pay your closing costs if you will pay the note in a short time.  At what point does it stop being better for the lender to pay your closing costs?  The answer depends on the pricing available at the time and can vary from 3 years to 12 years.  I'm happy to calculate it for you when the time comes to lock, and do so on every loan.  In the case below at 42 months, as the chart below shows, it becomes better to pay the costs yourself.

Loan Option

DHF Opt 1

DHF Opt 2

DHF Opt 3

Comp. #1

Comp #2

Loan Amount

$97,000.00

$100,000.00

$97,000.00

$97,000.00

$97,000.00

Fees Paid At Closing

$3,000.00

$0.00

$0.00

$2,450.00

$1,480.00

Interest Rate

5.875%

5.875%

6.750%

6.375%

6.875%

Monthly Payment

$573.79

$591.54

$629.14

$605.15

$637.22

Total Payments

$24,099.68

$24,844.68

$26,423.88

$25,416.30

$26,763.24

Loan Payoff

$92,401.01

$95,258.60

$93,055.82

$92,785.23

$93,142.91

Total Cost

$119,500.19

$120,103.28

$119,479.70

$120,651.53

$121,386.15

 

Again, at 42 months every Dream Home Funding option is less expensive than what the competition offers.  At 42 months Option 1 and Option 3 have nearly identical costs.  If I showed the figures for 43 months Option 1 would be slightly lower than Option 3 at that point. 

What if you don't have the funds to pay your closing costs though?  At what point is it better to finance them (Option 2) then to have the lender pay them (Option 3)?  This occurs after 52 months as shown in the table below.  At 53 months the total cost for Option 2 would be $125,199.14 versus $125,204.27 for Option 3.

Loan Option

DHF Opt 1

DHF Opt 2

DHF Opt 3

Comp. #1

Comp #2

Loan Amount

$97,000.00

$100,000.00

$97,000.00

$97,000.00

$97,000.00

Fees Paid At Closing

$3,000.00

$0.00

$0.00

$2,450.00

$1,480.00

Interest Rate

5.875%

5.875%

6.750%

6.375%

6.875%

Monthly Payment

$573.79

$591.54

$629.14

$605.15

$637.22

Total Payments

$29,837.08

$30,760.08

$32,715.28

$31,467.80

$33,135.44

Loan Payoff

$91,159.81

$93,978.96

$91,971.65

$91,635.73

$92,079.90

Total Cost

$123,996.89

$124,739.04

$124,686.93

$125,553.53

$126,695.34

The average person keeps their loan for 7 years.  The chart below compares your different loan alternatives over a 7 year period.

Loan Option

DHF Opt 1

DHF Opt 2

DHF Opt 3

Comp. #1

Comp #2

Loan Amount

$97,000.00

$100,000.00

$97,000.00

$97,000.00

$97,000.00

Fees Paid At Closing

$3,000.00

$0.00

$0.00

$2,450.00

$1,480.00

Interest Rate

5.875%

5.875%

6.750%

6.375%

6.875%

Monthly Payment

$573.79

$591.54

$629.14

$605.15

$637.22

Total Payments

$48,198.36

$49,689.36

$52,847.76

$50,832.60

$53,526.48

Loan Payoff

$86,754.95

$89,437.68

$88,063.87

$87,519.96

$88,239.88

Total Cost

$137,953.31

$139,127.04

$140,911.63

$140,802.56

$143,246.36

As you can see trying to save a few hundred dollars in fees up front can get pretty expensive if you are like the average borrower.  Over the 7 year life of your loan you will wind up paying an extra $3,000.00 to $5,300.00 on a $97,000.00 loan.  If you keep the loan for the entire 30 years the extra cost is really high as the table below demonstrates.

Loan Option

DHF Opt 1

DHF Opt 2

DHF Opt 3

Comp. #1

Comp #2

Loan Amount

$97,000.00

$100,000.00

$97,000.00

$97,000.00

$97,000.00

Fees Paid At Closing

$3,000.00

$0.00

$0.00

$2,450.00

$1,480.00

Interest Rate

5.875%

5.875%

6.750%

6.375%

6.875%

Monthly Payment

$573.79

$591.54

$629.14

$605.15

$637.22

Total Payments

$206,564.40

$212,954.40

$226,490.40

$217,854.00

$229,399.20

Loan Payoff

$0.00

$0.00

$0.00

$0.00

$0.00

Total Cost

$209,564.40

$212,954.40

$226,490.40

$220,304.00

$230,879.20

Over the life of your loan you could wind up paying $10,000.00 to $20,000.00 extra for a $97,000.00 house just by choosing the wrong lender or the wrong method of paying your lender.  The difference becomes even more dramatic on more expensive homes.  If the sellers of that $97,000.00 home tried to charge you $117,000.00 for it, you would laugh at them, but borrowers routinely let their lenders charge them 10-20% extra in interest by not knowing how to shop for a mortgage. 

In the long run it is always better to pay your own closing costs or finance them, yet most lenders force you to have the lender pay them, so they can conceal from you how much you are paying for their services.  You should do business with Dream Home Funding because we do not hide any of our compensation from you, we provide better service at a lower cost, we will help you determine the least expensive way to finance your home for the length of time you plan on owning it, and will deal with you openly and honestly.