Realty World – Friend & Associates

Long term savings on your Home Loan
When getting a home loan, everybody wants to get the best bargain. For a lot people, that means getting the lowest interest rate at no cost. But this is not always the best bargain for the borrower.
Many times a home owner will take that option and find themselves refinancing again in 2-5 years just because interest rates went a little lower. Every time you refinance your home you start the loan term all over again. That means if you had a 30 year fixed rate loan and if you refinance after only a few years, then you will have to start that 30 year loan term from the beginning for a full 30 years. That could cost you thousands of extra dollars over the years. This is money that goes to the banks and not toward your own investments. The banks love it when you refinance because they make money.
Don’t count on the banks to give you the best advice. Remember they want you to refinance even if it’s not the best bargain for you in the long term.
If you plan on staying in your home for more than 5 years it may be a better bargain to pay some fees up front and buy your interest rate down to a lower rate.  Then you don’t have to try to refinance every few years trying to chase interest rates down. The money you spend in the beginning may save you thousands and thousands of dollars over a 5 or 10 year period.
The lesson is: Pick a loan professional you can trust. Choose someone who is more interested in establishing a long term relationship by doing what is right for you instead of someone who has a quota to meet.
For a free, no obligation analysis of your current loan, give us a call at 408 684 4469

OK, so hopefully you have at least a basic understanding of how mortgage loans are created.  If I confused you don’t worry.  The really important stuff is coming up.
Mortgage banks have two ways to work with a borrower.  There is “retail” and there is “broker wholesale”.
Retail is when you walk into your bank and sit at someone’s desk and ask for a loan.  The bank may call them “loan consultants” or “mortgage professionals”… whatever. This is what you are doing if you go to Wells Fargo or B of A or Chase etc. You get only the programs that particular bank has to offer.
If you use a mortgage broker then the broker takes your loan application and shops around for the best “wholesale”pricing.  The mortgage broker has access with many different lenders with many different programs to choose from.
OK so what’s the difference? Well…I’m obviously biased towards brokers but I’ll try to be fair in my explanation.
RETAIL PRICING WITH A BANK When you walk into say…Chase or Wells Fargo and you meet a “loan consultant”.  He or she will show you their line of products.  To keep it simple let’s just stick with 30 year fixed loans for now.
So you get a rate quote and you usually have 2 choices.  You can get a no point loan which means you are not paying any points but will pay a higher interest rate, or you can pay points and get a lower rate.
Remember… the lower the rate the higher the upfront cost.  The bank has to sell that loan and they will not get as high a price from an investor for a lower interest rate.  So they basically have to charge you the difference.
WHOLESALE PRICING WITH A BROKER If you go to a broker he or she will check their wholesale pricing.  Wholesale pricing on loans is like any other commodity.  It’s cheaper than retail pricing.  So a broker picks an interest rate at their wholesale pricing from one of the lenders they deal with.  If you want to pay points then he/she can choose a lower interest rate.  If you don’t want to pay points then he/she will choose a slightly higher rate.
OK…so how does this work?
The table below will show a typical wholesale price sheet and will you how ALL loans are priced on the wholesale end.
Lock period
Rate 12 day 30 day 45 day
3.500                     0.250                     0.500                   0.625
3.625                     -0.125                    0.000                   -0.250
3.875                     -0.750                    -0.500                    -0.375
4.000                     -1.375                    -1.000                    -0.875
4.125                     -1.875                    -1.625                    -1.500
4.250                     -2.250                    -1.875                    -1.750
Take a look at the 3.50% rate at a lock period of 30 days.  The table tells us that the broker’s wholesale cost is one half (.500) of a point for that rate.
If you move down to 4.125% rate and the same lock period of 30 days you will see that the broker is now getting a “yield spread premium” of 1.625 points. That little minus sign means the lender is paying the broker for that rate.
That means the lender is going to pay the broker 1.625% of the loan amount for that rate.
You will also see that the higher the interest rate, the higher the yield spread premium.
A broker is going to usually try to make at least 1 point on a loan.  Sometimes more and sometimes less depending on the size of the loan and the complexity of the loan.
If we have a $400,000 loan and use the chart above for a 3.5% rate then you would have to pay .500 points to the lender and 1.0 points to the broker (if the broker was charging 1 point). (.500 + 1.0=1.50 points)  That’s $6,000 just in points for that 3.5% rate.  But if you didn’t want to pay any points and the broker needs to make a point then he would just slide down to 4.0% on a 30 day lock. You see there that the lender is paying the yield spread premium of 1.0 points.
So you should see that the higher the interest rate the lower the closing costs and the lower the rate the higher the cost.(See Part 1 of this Series.) Make sense?  ALL loans are priced this way.
At a retail bank such as Wells Fargo you will never see this matrix.  But it will be there in the background.
Some brokers will show this and some will not.  The lenders consider this confidential information so it depends on the broker. These sheets change daily and sometimes several times per day.  Depending on what is happening in the financial markets.
WATCH FOR PART 3  TO LEARN ABOUT CLOSING COSTS
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Ok, so you want a loan either for a purchase or a refinance.  Do you just pop into your bank and apply?  Should you use a mortgage broker?  Go online?
I’m going to explain as clearly as I can how ALL loans are priced.  First let’s cover some basic mortgage concepts.  I’m going to try to keep this very simple.
A “conforming” loan is a loan amount of $417K or less.  In some counties like Santa Clara County the conforming loan limit is as high as $625K.  If the loan amount is higher than $625K then it is considered a “jumbo” loan.  I’m going to talk mainly about conforming loans but the same concepts apply to jumbo loans as well.
Interest rates on loans are priced based on “points”. A point is equal to 1% of the loan amount. So, one point on a $100,000 loan is equal to $1,000. On a $200,000 loan it is $2,000 etc.
Loans are “originated” by “mortgage banks”.  A mortgage bank is a lender that makes the loan and then sells it on what is called the “secondary market”.  Generally they do not have depositors or allow customers to have an account, but sometimes the mortgage bank is a large bank like Wells Fargo or BofA.
A mortgage bank strikes a deal with an investor-usually another large financial institution.  The bank will make the loan to the borrower. Afterwards the investor will then purchase that loan for a set price. This “price” is based on percentage points of the loan amount.  Remember that term “points”? The investor may keep the loan on its books or it may sell it again.  This is a very basic description of the “secondary market”.
The higher the interest rate the more the investor will pay for the loan since it gives a higher return.  So an investor will pay a mortgage bank more for a 4.5% 30 year loan than it will for a 4.0% 30 year loan.
These negotiated prices between the investor and the mortgage bank will vary depending on the financial markets and may vary depending on the size of the mortgage bank and the amount of money being committed by the investor.
Pretty much all conforming loans are priced based on what the US Treasury bonds are doing.  The bonds that have the most impact on mortgage rates are the 10 year bond and the 30 year bond. Basically ALL lenders respond to what the bond market dictates.
Typically, when the yield of the bond goes down, so do interest rates.  (The ‘yield’ is the return on investment.) There are always exceptions but this is basically what happens.  I’m not going to get into the details of secondary markets and mortgage backed securities. It’s not something you need to know in order to get the best rate at the best price.
KEY CONCEPTS TO KEEP IN MIND:
Just remember that loans are made, then bought and sold by investors.
Investors pay more for loans with higher interest rates.
Mortgage interest rates are affected by the US Treasury bond markets.
The lower the yield,  the lower the interest rates.
ALL lenders play by the same rules.
Part 2 will help you learn the difference between ‘retail’ and ‘wholesale’ pricing, why choose a broker or a bank, and how do rate sheets work!  Stay tuned!
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