Saving Money in The Mortgage Process-Keeping an Eye on the Costs

Would you like to save money on your next mortgage? Who
wouldn't?!

There are at least three distinct ways to save money and two of
them work very well together.

1. Try to get the fees reduced from as many service providers
as possible.

2. Make sure that you are treated fairly by paying reasonable
fees, and don't overpay.

3. Make sure that the mortgage product you are getting is
truly suitable for you so that you are not forced to go
through the process prematurely or pay additional fees
upon payoff.

Let's take a look at how these strategies can work for you.

1. Getting the fees reduced.

In my opinion, this strategy is the least productive for a
number of reasons.

A couple of issues ago, I went through a list of typical costs
that borrowers encounter on their settlement statement. Most
of these were fixed costs for things like appraisal, credit report,
processing fees, document preparation, sign-up service,
escrow fee, title fee and loan origination fee.

It is very difficult to generate substantial savings by working
on most of these fees. We are not going to be able to ask
Federal Express or UPS to reduce their messenger fees.
There is no negotiation for credit report fees, flood deter-
mination fees, most escrow or title fees or the fee structure
that the lenders impose for their administrative fees.

In fact, because of the scrutiny by regulators, lenders in
particular cannot negotiate their fees. They could be
accused of discriminatory lending practices for reducing
the fee to one borrower and maintaining a higher fee for
someone else.

Also, there are some diminishing returns even if you are
successful in negotiating reasonable service fees downward.

We all work to provide for ourselves and our families. If a
service provider is attentive, conscientious, competent, and
delivers what they promise, they deserve a reasonable fee
for their service. If you are successful in "grinding" them
down on their fees, you may find that their incentive to do
a quality job for you is diminished. If they have a choice to
finish their work on a transaction for which they will be paid
in full, or to prioritize a job for the client who is paying them
less than their standard fee, they will probably work harder
for the full fee.

This does not mean that you should blindly pay anything
that is asked of you. Which leads us to Point 2.

2. Pay Reasonable Fees, and Don't Overpay.

As part of your research for getting your mortgage, you
should have a good idea of what is considered a normal
range for the closing costs.

You may choose to have them enumerated to you, or
to compare the Good Faith Estimates that are provided
to you shortly after loan application.

You may just want to know the total amounts, figuring
that there will be some variance on each of the individual
fees, but that your final amount should not exceed a
limit that you have determined.

You will definitely want to determine who can be your
trusted advisor to help you understand what the fees are
for, if they are warranted in your case, and if the amounts
being charged are reasonable.

If that person is someone like me, you will get straight
answers and thorough explanations without the mumbo-
jumbo that is common in the mortgage business.

In fact, every good decision that you make will be as a
result of finding the right people to help you through the
process.

What you want to avoid are the loan originators who have
mark-ups on services provided to them, and who negotiate
additional payments from the lenders without informing you
and then charging you as if they weren't receiving that
compensation.

For example, credit reports are usually billed at $15-20.
If your lender charges you $50, you are being overcharged
in an unscrupulous manner. Your trusted advisor could
help you uncover that kind of activity.

In mortgage brokerage, we are provided a matrix of
pricing choices from the lenders. They tell us on a daily
basis what interest rates are available, and what the
"price" is for that rate. The prices can either be quoted
as 'discount", "par", or "premium".

Discount points mean that the borrower will pay the
lender to obtain the corresponding interest rate in addition
to the loan origination fee. The borrower would be getting
an interest rate that is lower than the "normal" rate of the
day.

Par means that the lender will neither receive a fee or
pay a fee for that interest rate. This interest rate is
considered "normal" for the day. The borrower pays the loan
origination fee in this case and that should be properly disclosed
by the broker.

Premium means that the lender will pay a fee to obtain
an interest rate that is higher than the "normal" rate of
the day. The fee that the lender is paying, plus the
fee quoted to the borrower for loan origination would
comprise the compensation to the mortgage broker.

The way you "save" money in these cases is to be attentive to
the fees you are quoted. Accept the fact that you will pay
reasonable fees for the services performed. But, refuse to
do business with companies or persons who will try to slip
the extra, unwarranted costs along to you, or who attempt
to be extraordinarily compensated without adding additional
value.

3. Suitability of Mortgage Product.

When you go through the mortgage process, you will probably
pay a few thousand dollars for closing costs in addition to any
loan origination fee that you agree to pay.

It's easy to lose sight of that cost in the sheer magnitude of
the amount of money being borrowed.

There are times that ending your mortgage contract early and
paying additional fees to refinance your loan is to your obvious
benefit. An easy example is when interest rates drop and you
can have the benefit of a lower rate and lower payment, and
the costs for the refinance can be recovered over a short period
of time.

These choices should be made voluntarily by you because the
rewards to you are so clear.

There are times that you may feel the need to refinance, and it
is still beneficial, but the need should never have existed in the
first place.

Before you finalize your decision on the type of loan you are
seeking, make sure that your loan originator is doing a good job
of understanding your needs, your goals, your risk tolerance and
your time horizons.

Without a candid conversation about these areas, you may very
well find yourself placed in a loan that is inappropriate for you.
When that happens, you will seek a new solution to the problem
it creates and you will spend more money for a new loan that
may never have been needed if things had been done properly
at the beginning.

Let's say that you plan on living in the home for 5-10 years. If a
loan originator understands this, they should be seeking loans for
you that include 30-year loans, as well as those that are fixed for
5, 7, and 10 years. A recommendation for a 3-year fixed rate loan,
or an adjustable rate loan should only be made when you fully
understand the risks of rate changes that those loans would entail.

There are times that your credit score, or employment situation may
dictate that a 3-year fixed or an adjustable rate loan are the only
available choices. But, this needs to be fully explained to you, and
you should be able to verify it with your trusted advisor. Otherwise,
you have fallen prey to someone who will be paid for that piece of
business, and is hoping to "churn" your mortgage for additional future
compensation without regard to your needs.

Another thing to look out for is the prepayment penalty. Again, there
are times that the best terms available may include this clause in
the documents. But you need to know what the alternative rate and
fee structure would be without a prepayment penalty so that you can
make an informed decision. Or you need to accept the prepayment
clause for a limited period of time - say, 1 year or 3 years - if that
fits your comfort zone.

The unscrupulous loan originator will accept compensation from the
lender (as a premium) for including a prepayment fee in the loan.
They will fail to inform you of that fact, and when you are ready to
pay off the loan, you will discover that it costs additional thousands
of dollars to get out of the loan.

Don't let these kind of things happen to you.

And the best way to save money in the mortgage process is to
combine Strategies 2 & 3, and it all starts with working with the
right person. They will care about your goals and your needs, and
will deliver their service at fair compensation levels. No mark-ups,
or trying to slip in extra fees or terms that trigger the early payoff
of your loan because you can't tolerate what you were put into.

Look for the right person.