First, understand that your mortgage broker is in a profitable business, and their first concern is to make money. So you know immediately that there is no free loan. Not only are there interest rates to deal with, but there are other fees that affect your overall costs, and very few standards to regulate them. One of these things is the “point.”
Loan officers are paid by commission and share the fees with their brokerage firm. So, from the moment you complete your application, you will work out ways to earn more than the interest rate, and this process starts with your application fee (or loan fee). So, if you have bad credit, if a broker insists on this fee in advance, be suspicious. Most mortgage brokers charge the current interest rate plus a point issue fee.
Moreover, what is this omnipresent “point”? One point equals 1% of your loan amount. So, if your loan amount is $ 100,000, one point for you is $ 1,000. With some mortgage brokers, you have the option to pay them into the loan amount, but that means that you add interest payments – over time, interest rates on this $ 1000 pretty much adds up. If you can, you pay this in advance so that you save that interest and you can deduct it from income tax.
For government-guaranteed and guaranteed loans – FHA and VA – the buyer does not pay the points; the seller does it. Even with other types of loans, it would be worth negotiating the purchase price with the seller.
One type of point system to watch out for is what some brokers call points on the back or yield spread fees. This is where brokers and loan officers earn extra money by selling loans that have a higher interest rate – some say it is a bribe for selling a more expensive loan. They often do this with those who can not afford their credit. By attaching one percentage point to the loan, they pay their fees. Over time, this costs a borrower dearly.
Although letting borrowers pay higher fees is illegal, it is a difficult area to assess. Even HUD stated in 1999 that this depends on the circumstances of each borrower-broker relationship. This is unfortunate because a careless borrower who may have some cash can become a victim of this technology – so the borrower whose broker “forgets” to tell her about the “additional” closing costs or fees.
Do your homework as well as your shopping, especially if your credit is spotty. People with bad credit are often exploited in the mortgage market. Regardless of your category, you insist on fully disclosing the closing costs and fees of your broker, including the yield premiums. Even if you think you know what that means, let them tell you in plain language.