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We are passionate about the “customer
for life” philosophy. Therefore, we always strive to keep
you informed of the important facts you need to know about mortgages
and the role they play in financial markets. Have you ever wondered
where the money comes from to fund the trillions of dollars in
mortgages every year? Or why interest rates vary so much from
lender to lender? Our hope is that you will find the answers
below and capitalize on our competitive advantages for many years
to come.
Closing
Costs | The
Mortgage Market
CLOSING
COSTS
You must understand loan terms (fixed or adjustable), points/origination
fees, and closing costs to make an accurate comparison between
two loans. It is very confusing if you cannot differentiate
between the fees involved in obtaining a mortgage loan and
what you can and can’t negotiate. Please let us explain!
The most important
document you sign at a loan closing that summarizes all fees
associated with the loan is called a HUD-1 Settlement Statement
(HUD-1). This is preceded by a Good Faith Estimate (GFE) from
the lender when you apply for a mortgage. Although the lender
cannot guarantee all costs associated with a loan on a GFE,
they should be able to guarantee lender related fees. Below
is an outline of the GFE and HUD-1 along with an explanation
of what fees can and can’t be
negotiated:
Section 800 (Negotiable Lender Related
Fees)
These are fees lenders & originators control that directly
affect the interest rate of a mortgage. In other words, if
a lender extends a mortgage with zero points and zero origination
fees the interest rate will be higher than if they extend a
mortgage with one point. When comparing loans you must understand
the total lender related fees including points and origination. For example,
many lenders offer loans without charging points or origination fees, however,
their other lender fees tend to be high, i.e. an $895 underwriting fee, $500
processing fee, $300 administration fee, etc. You need to know the total lender
related fees (as disclosed in section 800 on the GFE) and interest rate associated
with the fee structure. In addition, ask for a guarantee to ensure that these
do not change at the closing table.
Lender Related Fees consist of: Origination,
Discount, Broker, Underwriting, Processing, Administration, Document
Preparation, Appraisal, Credit Report, Courier, Flood Certification,
Tax Service, etc.
Sections 1100,
1200, & 1300 (Title & Recording
Fees)
These fees are not negotiable because the services are provided
by third parties. They are associated with title insurance
fees, escrow or closing fees, government recording fees, and
other fees such as home and pest inspections. Although third
party providers may charge a slightly different amount, we
believe it is not worth your time to negotiate because of the
small amount you would potentially save. The fees charged in
this section will almost always be within $100 of another lender’s
quote. Furthermore, it is important for the lender to maintain
good working relationships with these third party service providers
so they process orders efficiently. Lenders and third party service providers
do not want to haggle over small dollars on such a large and important transaction.
It is far more productive for you to understand Section 800 above.
Sections 900 & 1000 (Reserves for
Taxes & Insurance & Odd Days Interest)
Simply stated, these costs do not vary from lender to lender. They are associated
with costs directly related to your property and odd days interest on the new
mortgage (the number of days from the funding date until the last day of the
month). These costs are some of the most confusing and commonly omitted on
Good Faith Estimates (GFE). If these are not disclosed on a GFE you need to
understand why. It is most likely because your taxes and insurance are not
being escrowed for payment by the lender which means you are required to make
your annual property insurance and tax payments directly out of your pocket.
If you are refinancing the escrow balance at your current mortgage company
will be refunded to you to offset these costs.
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THE
MORTGAGE MARKET
The mortgage markets consist of a primary and secondary market.
When you apply for a mortgage you are almost always dealing
with a loan originator in the primary market. The primary
market then aggregates loans for sale into the secondary
market in order to free capital requirements that allow it
to fund future borrower’s mortgages. A mortgage loan
is often sold multiple times in the primary market before
it is bought by the secondary market.
Doesn’t it make sense that you will get
a better mortgage if you are dealing with a company that eliminates
as many primary market participants (or middlemen) as possible?
This is exactly what we have accomplished by establishing direct
relationships with secondary market institutions such as real
estate investment trusts (REIT’s) and securities dealers.
Please read on to learn more!
The Primary Market
The primary market consists of mortgage loan originators (bankers & brokers),
local and national banks, lenders, conduits, credit unions, and any other institution
willing to underwrite a mortgage. In fact, the secondary market uses the term
originator to refer to the original lender. Most originators extend loans with
the understanding they will sell those loans to lending/servicing institutions
in the primary market.
Originators sell loans
so they can free capital, allowing them to extend additional
loans which will in turn be sold again to lending/servicing
institutions. These institutions aggregate mortgage loans,
service them, and sell them to the secondary market as part
of a “mortgage-backed security” or “securitization.”
The Secondary Market
The secondary market comprises of companies that earn interest from the mortgages
they have purchased from the primary market. These companies consist of securities
dealers, real estate investment trusts (REIT’s), mutual funds, pension/retirement
funds, insurance companies, and government-sponsored entities such as Fannie
Mae and Freddie Mac. These companies generate revenue from the interest you
pay on your loan and, if profitable, pass the income along to its shareholders
through dividends and/or interest income.
The mortgage you obtain
will eventually be sold into what is known as a "mortgage-backed security” or “securitization.” This
will not change the terms of your mortgage but it could change
where you pay your monthly payment. Regardless of who buys or
services your loan, the terms of your mortgage are bound by legal
recorded documents with the original lender.
Fannie Mae (Federal
National Mortgage Association) and Freddie Mac (Federal Home
Loan Mortgage Corporation) are large government chartered corporations
that play a major role in the secondary market. They are publicly
traded, profit oriented, and you can buy stock in either company.
However, the U.S. Congress retains certain controls over their
operations. These two companies purchase approximately one-half
of the residential mortgages originated in the primary market
every year. The other half are purchased by securities dealers,
REIT’s, mutual funds,
etc.
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