Mortgage Secrets: Pay Less Fees and Interest

Certified Mortgage Advisor
NMLS 1701021
April 1, 2020

Secrets that we can reveal

We're talking about some mortgage secrets. So I'm gonna let you inside on some tips and tricks that you might not know that might, they're gonna help you save some money on interest and fees.

Underwriting fees and points

So when you're shopping for lenders, they're going to give you different estimates of what the rate is going to be along with closing costs as well. And something that you're going to run into is points and any origination charges. so your origination fees, these are things like an underwriting fee, Maybe an admin fee. Sometimes you have a document preparation fee, a processing fee, all these random fees that a lender might charge. These are real fees. Lenders have to charge money to get a loan closed, but know that when you compare loans and you compare lenders that you might have a lender A who charges an underwriter and has a certain rate, and lender B charges, a higher interest rate, but has no fees.

Compare Fee and Rate

So basically what ends up happening is those fees get put into the rate. So all this to say, when you are looking to compare lenders, make sure that you're comparing fee to fee, and rate to rate. That way, you have a fair comparison.

Don't look at lender a who has a thousand dollars in fees and a lower rate, and say that they're better than lender B who has a higher rate and zero fees because what you can do is just ask lender B to show you what it would look like if you if they charge the same amount in points as other lender does in fees to get the same rate. So hope that makes sense.

Watch for point stuffing

So point stuffing has a really big, especially on refinances. This is where you really need to watch for. What I mean by that is when a lender takes points on a loan and puts them in there and not really hopes that you don't pay attention to them, but normally they just they're just going to charge those points and assume that you don't really know what you're looking at.

Someone who does this a lot is Quicken loans. They put points in everything, especially refinances. So they'll go out and advertise. We have a 3.2, 5% rate, but they're charging two points. So one point is 1% of alone and that helps you decrease your interest rate. So if you pay, let's say, for instance, you had an interest rate of 4%. You might be able to pay one point and bring that down to 3.875%. So you paid 1% of your loan upfront, prepaid interest to lower your interest rate.

So normally a little bit of points is fine. I would say less than one point is normally always fine. When you start to get above one point, you need to start looking at a break-even table to see how long is it going to take you to recoup this money?

So what happens a lot on refinances is lenders want to lure you in with a lower rate. And what they're doing is they're just stuffing a bunch of points in there and increasing your loan amount because you don't really care. You just see a low interest rate. I don't have to bring money to the table. It's a win, right? No, because it's, you're paying thousands of dollars added to your loan. You were already working on paying down your loan and they just increased your loan amount. So you could have a lower rate. So you could feel better. Who cares about that? You really want to pay off your loan quicker and not just have a lower interest rate.

Look at waiving escrows

I have a video about escrows and if you should use them or if you should waive them, I personally always want to waive escrows. Waiving escrows is going to save you potentially thousands of dollars at closing, because at closing, if you have an escrow account, normally you're going to have to pay a few months of homeowners insurance and a few months of property taxes.

And those are going to sit in the aside account, almost like a security deposit for rent, except this is like a security deposit for insurance and taxes. And that money just sits there and collects dust. So instead I would waive the escrow account, just pay taxes and insurance on your own. It's not difficult to do at all.

So normally you need to put 20% down or have an 80. Loan, right? 80% loan to value, which is the same thing. As 20% down, you need to have 20% down to waive escrows. There are some lenders that we work with that will allow you to waive it with only 5% down. So I'm a big fan of waiving escrows. If you can, you're going to save yourself so much money if you do that.

This is all about credit score brackets

Next, when you're getting interest rates and quotes from lenders, this game about getting a mortgage is all about credit score brackets.

Improve your credit score and reach the next bracket

So the way that interest rates are given in determined is by what category of credit score you fall into. So the lower your credit score, the higher your. And the higher your credit score, the lower your interest rate and it's all bracketed. So a good example would be somebody who has a 638 credit score. When I see somebody who has a 638 credit score, I want them to hold off buying for at least another month, because the moment they cross the threshold of 640, all of a sudden interest rates start getting a lot better.

Same thing with the next bracket-up. When they cross over 680 interest rates are getting even more. And then once they start crossing 700, they get even better. So they're all bracketed as they go up. So talk with your lender about, Hey, if my score increased by just five points, what have we got up to that next bracket?

How much could that change my interest rate? Because then, maybe I only need to wait a month or two to increase my score to potentially save thousands of dollars on my interest rate. Because it can feel really ambiguous, right? Your credit score is going up and down. You're thinking, how does it impact the interest rate?

It's all based on these brackets. So talk to your lender about what's the next bracket that you can get to, to get that lower interest rate.

Down payment will improve your rate

Also, your down payment is going to change the rate as well. So what I try to do when I'm pricing out quotes for my clients is make sure that we set up their loan to have the most cost savings possible.

And one of the ways that we do that, sometimes it's actually. Decreasing their down payment. So a good example is on smaller loans. So if somebody is looking to buy a house for, let's say $120,000. If they put $30,000, down their loan, all of a sudden is below a hundred thousand dollars. That is actually a higher interest rate loan than a loan that's above a hundred thousand dollars. So smaller loans are actually riskier to lenders. So they have a higher interest rate.

Sometimes what can happen is if you put 20% down, you might have a higher interest rate than if you put 5% down. So you want to work with a lender. Who's going to show you different down payment options, because if you're comfortable putting 10% down, what I would do is look at what's the rate for 10% down.

What's the rate at 5% down, what's the rate at 3% down. And then if let's say 5% down has a better rate. What you can do is put the down payment on five. And then on your first payment, just add the extra 5% that you have remaining on the first payment that we took advantage of the lower interest rate, but you still put the same amount of equity into the home. So work with a lender who understands is going to help you explore what those options look like.

Bank charge higher on government loans

Also, something to note is that banks normally charge higher interest rates on government loans than somebody like a broker would. I am a mortgage broker, myself, meaning that we shop for mortgage lenders on behalf of our clients. So we work for our clients and help them find great loan products.

Whereas a bank only works for the bank, they only represent that pool of money. As a broker, there's no intermediary fee or middleman fee that people think exists. The lender is the one who pays the broker. The client never has to pay the broker.

So sometimes what happens with these banks is that since they're government-insured loans they are able to make more profit on them. And what they do is they normally just pocket the extra profit, someone like a broker isn't allowed to do that. They have to pass on that savings to you.

Connect with broker

So if you're looking at a government loan, like an FHA loan, USDA, VA, try going with a broker, same with conventional. I'd definitely price it out with a broker. Government loans, especially you're going to find lower rates going with a broker because they can't take any extra profit and pocket it like a bank can pull whatever margin they want on that loan.

So if they have a loan that's less risky, they're just going to pull the profit, keep the rate high so that they could have extra money. A broker can't do that legally. They have to pass on the savings your way.

Focus on low costs

We've been so trained in all this marketing material to focus on rate. It's all about rate, and what's ended up happening is we get so tunnel vision focused on the rate that we forget about cost. Just like point stuffing. We, people, get so focused on this low rate that they're willing to pay thousands of dollars in prepaid interest that they spent years trying to pay down on their mortgage.

Aim for low cost and refinance

So what I would always suggest is to focus on going with the lower cost first and then refinance into something that's cheaper. So let's run through an example. Let's say right now you could get an interest rate of 4%. If you could get an interest rate of 4% right now, what I would actually do is I would actually probably take an interest rate of maybe four and a half percent or 5% and receive a credit back at closing towards some of my closing costs.

So I've got some free money. Let's say I got $2,000 in credit because I'd taken my rate up to 5%.  I got $2,000 of free money. And then when interest rates drop in the future, then I would refinance into a cheaper mortgage. I got those costs. I took advantage of the credit that was available to me.

Get out of the tunnel and look for opportunities

So don't always focus on getting the lowest rate possible, especially if you have to pay for it, because there's going to be so many opportunities to refinance when rates do lower, because rates are always going to cycle up and down. So I wouldn't focus so much on the rate as I would, you have to have the proper balance between rate and cost.

Prepaid interest

You can close at the end of the month to save some more money on prepaid interest. So prepaid interest is basically what you're charged from the time that you close until your first payment is due. So a minimum of a month is always skipped between your closing date and when your first payment is due.

So that extra gap, plus any days in between after that, get charged interest. You don't have to be a principal on it, but you have to pay interest. So if you close at the end of the month, let's say, you close on the 30th. You only have to pay one day of prepaid interest. If you close on the first, you're going to pay 30-days of prepaid interest.

So that could be anywhere from, the difference of on a smaller loan, $200, two on a larger loan upwards of five, 700, a thousand dollars that you could save in closing costs. If you close at the end of the month.

Get a real cost analysis

Don't just compare rates. What I see people do so much is we've been so focused on our thought to just focus on the interest rate. So they go around and call and say, what's your rate? What's your rate? That person had the lowest rate. I'm going to go with them and you end up finding out that actually wasn't the cheapest loan, that one had points and that one had cost to it that the other lenders didn't. So I always suggest getting a full cost analysis and not just comparing rates.

Know the difference, and what matters to you

We do that by a tool called a total cost analysis, where we have a custom webpage that we give all of our clients. It lays out each loan. So we'll say a loan, A, B, and C. You can see the rate, the payment, the closing costs. But then it's going to detail and your actual costs. So we're five years of what's the actual cost difference in the savings between the loans.

So then it will say, loan C is the cheapest over five years, over 10 years, loan B is the cheapest and it helps you break down what really matters, which is the money that comes out of your pocket, not this imaginary number like the interest rate.

The interest rate is just a representation of how money is moving. Not necessarily how much, how quickly it's coming out of your pocket. And I think that's where we get confused with interest rates a lot is we think the interest rate is exactly how much money is getting pulled out of my pocket each month. And that's not true. The interest rate is just a metric. A little bit of how that money is moving, but there are more parts and pieces that go into it.

Yes, lenders can help you

So work with a lender. Who's going to detail these loans. Side-by-side, who's going to shop on your behalf and show you, what would it look like if you change your credit score by a couple of points. Can we get to the next bracket and save money? What would it look like? If we did different down payments, can we get to a different loan amount bracket and save money?

What would it look like if we could compare five different loans side-by-side and saw what's the actual cost difference between these.

This should give you a good idea of how to lower some fees and interest here. If you want to learn more about escrow accounts and saving money, this video right here is going to help you understand everything you need to know about escrow accounts and why you absolutely need to waive them.

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