When you are purchasing a new home or refinancing your home there are some mortgage tips which you should know in order to get the best deal.
Lets start with the most important issue and that is Fees and Points
Mortgage Fees are fees that have to be paid in order to get the loan closed. In many cases, like refinancing, these fees can be wrapped right into the loan so you do not have to pay anything out of pocket. In many purchase transactions there is a down payment and fee’s need to be paid out of pocket with the down payment.
- Origination and Points: Origination and Points refer to the percentage paid to the mortgage broker/loan officer. Normal origination fees on any mortgage should be about 1% on the front of the loan and 1% on the back of the loan (“on the back” points are called YSP or Yield spread premium which I will explain below.) If your loan is $150,000 then the origination fee should be around $1,500 and the YSP around 1% or $1,500. Note: YSP dollar amount is paid by the bank, but is determined by the interest rate (see below).
- 3rd Party Fees: 3rd party fees can vary from bank to bank, lender to lender, loan officer to loan officer and loan to loan. Therefor it is difficult to give you a good estimate of what 3rd part fees should cost. On the low end they can be about $1,800 up to $3,500. This is a wide range, so be sure to compare 3rd party fees from loan officer to loan officer. 3rd Party fees include: (some fees only apply to purchases and some only to refinancing. These are the normal fees you may see on your Good Faith Estimate (GFE), but this list is not complete. Be sure to review the fees on your loan carefully.)
- Loan application fees
- Credit Report
- Title search and insurance fees
- Lender’s attorney fees
- Property appraisal
- Recording fees
- Transfer taxes
- Buyer’s attorney
- Escrow Fees
Yield Spread Premium (YSP): Yield Spread Premium is another way in which the loan officer/mortgage broker can make money on your loan. YSP is completely legal and a very good thing to understand and try and take advantage of. YSP legally has to be disclosed to you, but many loan officers attempt to skim over this information either because it is difficult to understand or they are trying to make extra money with it. A good loan officer will explain the YSP and show you options with the YSP and your loan.
YSP affects the interest rate of your loan. When a loan officer looks at rates from a bank they will look something like this.
|4.5%||0% (par rate)|
The YSP percentage is what the bank will pay the loan officer if they sell the loan at that interest rate. So in this case say you sign a lock in agreement for 5.5%. The bank which is funding the loan will pay the loan offer/mortgage broker 1%. So on a $150,000 that equals $1,500.
How you can take advantage of YSP: Now that you know what YSP is you will need to know how to use it to the best of your advantage. Do not say to your loan officer “I know what YSP is and I don’t want to pay it.” YSP is very normal on a loan and using it to work for you is what you need to do. A good loan officer deserves 2% – 2.5% on the loan whether that is up front or on the back. “Discount” loan officers will usually cause you more headaches because of errors and a slow process.
Lets use the example chart from above. If you decide to take the 4.5% interest rate with 0% YSP that 1 % will be moved to the front of the loan. Therefor your origination fee will be 2% instead of 1%. Essentially you are paying up front to lower your interest rate to the lowest rate possible. Many times this makes a lot of sense to do because you will save money in the long run by paying lower monthly payments with the lower rate.
You can determine how many months it will take to repay the 1% by doing a simple calculation. Lets use these figures.
- $150,000 Loan Amount
- 5.5% with 1% YSP
- 4.5% with 0% YSP
Hypothetically the payment on the $150,000 at 5% equals $700. The payment on the 4.5% equals $600, but remember it cost you $1,500 up front by paying for that 1% on the front of the loan. The difference between the payments is $100 which means it will take you 15 months to pay the difference of the $1,500. If you stay in your house longer than 15 months then every month you are saving/earning $100.
Difference between YSP and Buying down points: This concept works the exact same when you want to buy your rate down with extra points. The simple difference is that YSP is usually apart of a normal loan and you can learn to take advantage of points and dollar amounts that are already apart of the loan. Buying down points usually means that you will pay an extra percent of the loan to get a rate under the Par Rate (Par rate is the Rate in which there is 0% YSP).
Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is a monthly amount you have to pay if your mortgage is above a certain Loan to Value (LTV). Loan to Value is calculated by taking the current balance of your mortgage and dividing it by the appraised value of your home. If you have a $150,000 mortgage and your house appraises for $200,000 then your LTV equals 75%.
When the mortgage on your house exceed 80% LTV you will need to pay Mortgage Insurance (in most cases). Mortgage Insurance really does nothing for you as the borrower. It is in place for the lender or bank in cases of High Risk, and over 80% LTV is considered higher risk.
There are a few ways you can avoid mortgage insurance. If you are a veteran and qualify for a VA loan you will not have mortgage insurance. VA loans never have PMI. Taking out a second mortgage can help you avoid PMI. If your first mortgage is 80% and your second mortgage is 15% you will not have PMI. Although in the current condition of lenders and banks 2nd mortgages are extremely difficult to find and qualify for. If you are purchasing a home in a rural area be sure to find a lender that offers USDA Loans. USDA loans often times do not have mortgage insurance.
Taxes and Insurance (PITI):
Taxes and Insurance are a normal part of every loan. This Insurance is far different from mortgage insurance which was discussed above that does nothing for you. Homeowners Insurance is what is required here. This protects your house from things like damages and theft. This insurance helps and protects you the homeowner. No lender or bank will lend on a home that is uninsured so yes it is mandatory. In fact if for some reason your home becomes uninsured at any point the bank will sign you up for insurance and that is not cheap.
Taxes are taxes and must be paid. Property taxes are based on the tax assessed value of your home. This is usually lower than an appraised value, but is only used to determine property taxes.