You’ve heard the saying, “If it seems too good to be true, it probably is”. Watch out for lenders that say they will beat all other rates or those that advertise ridiculously low rates. Every week you probably get ads in the mail or see billboards that advertise “rates as low as 1% with zero down”. Do these loans exist? Absolutely, however they are not always appropriate programs for most consumers and typically apply to investor situations where the 1% rate only lasts for a few months and then adjusts quickly to higher than average rates. I equate this kind of advertising with the car dealership ads you see in the paper that show a car with a ridiculously low price but when you get to the dealership you have a hard time finding the car you saw in the ad or it has been mysteriously sold.
Lenders use this low rate advertising to get you in the door, but 9 times out of 10 the story changes and they say “that program is not right for you but I have another that might work”. Or even worse, there are unexplained fees that show up at signing. Is this kind of advertising ethical or honest? It can end up that way, but I believe that transparency and disclosure in every step of a loan transaction is better for everyone involved, especially when you are talking about a large investment like a home. I never print or advertise rates because they can be mis-leading to clients. A loan program should not be judged on interest rate alone and your personal situation has to be considered.
Most consumers don’t know how to calculate the APR of a loan and most don’t know what it is comprised of. Lenders take advantage of this lack of knowledge. APR is the “Annual Percentage Rate” of the loan and it is the total cost of a loan, which includes the interest rate plus any pre-paid finance charges that are being paid at closing. These pre-paid finance charges are what the mortgage broker, the lender and the title company are charging to complete the loan. These include Loan Origination fees, any discount points you might be paying to reduce the interest rate, handling fees, credit score fees, title fees, underwriting fees, processing fees, wire transfers and whatever else the lender may charge for. APR is the best measurement tool for consumers to use when shopping for a loan. Compare APRs to make sure one lender is not gouging you on the pre-paid finance charges. The APR will always be higher than the interest rate because it is based on the actual amount of the loan, which includes what you are paying in discount points and whatever the lender is charging to complete the loan. As a general rule, if the APR is 2.5% greater than your interest rate, you are getting ripped off.
The other day I went to the website of whom I would consider to be a very reputable lender and they had an advertisement for an APR rate, I won’t quote the rate because it caught my eye as being exceptionally low, so I clicked on the fine print button they had on the web page to learn more. I discovered that they had pulled out the Loan Origination fees, title fees, broker fees and underwriting fees when they calculated the APR. Imagine your confusion and dismay when you are sitting at the closing table and the APR suddenly jumps 2% points because you didn’t read the fine print. An increase of that size could kill your deal and you could lose the chance to buy your dream home. When you are getting pre-qualified for a loan, always ask the loan officer or mortgage consultant for a truth in lending disclosure statement. This is a standard form that all brokers use to disclose the APR and finance charges. Along with the truth in lending document should also be a Good Faith Estimate that shows the breakdown of charges the lender is asking for. APR confusion can be easily avoided if you ask for these disclosures upfront.
A broker makes a majority of their money on either the frontside of a loan called an “Origination Fee”, or on the backside of a loan by increasing your interest rate. Some make money on both the frontside and backside, which is why understanding APR is so important. Now, it’s perfectly OK for the broker to make money and I’m not suggesting you shouldn’t pay someone for their valuable services, but you should know if you are paying too much.
Backside slaughter happens when the broker overcharges on the interest rate. If your loan officer sends you a good faith estimate that shows you aren’t paying an origination fee (and you’ll see this advertised as well “no origination fees”), I guarantee you will be paying the origination fees in the interest rate. So, how do you avoid backside slaughter? Research current rates or ask another lender for a competitive quote.
By law, you should receive a Good Faith Estimate within 3 days of submitting your loan application. A Good Faith Estimate, or GFE, provides a list of all the costs associated with the mortgage program you’ve applied for. Take a look at the pre-paid finance charges listed in the top section of the GFE, you should see things like: Loan Origination Fee, Loan Discount Points, Processing Fees, Appraisal Fees, Credit Report fees, Tax Service Fee, Document Preparation Fee and Flood Certification Fee. Some lenders will also include what are called “junk fees” to unknowing consumers. Junk fees are not related to a real product or service but are included by unethical lenders to squeeze extra money out of you. If any fees seem questionable or vague, ask your mortgage consultant for clarification.
These are two common overcharging practices - one method is charging more based on the loan amount and the other is charging more for bad credit. Both are equally unethical from my perspective. This is the most important thing to remember in regards to these two rip-off tactics: The amount of work for a lender or mortgage broker does not change because you have bad credit or because you are buying a $1M house vs. a $100,000 house. The amount of paperwork doesn’t change and the processing effort doesn’t change. There may be cases where more consultation is needed by the loan officer but, for the most part, these should not double the fee structure. This is probably one of the most frequently used rip-off tactics because it is the easiest thing for a trusting consumer to rationalize...The loan officer tells you, “Well, I had to do some real negotiating and I was able to get you approved, but your fees will be higher because of your bad credit score”. If you hear these words, run away. I have seen this result in doubling the fees paid to the broker. The best way to avoid these rip-offs is to use a loan office or mortgage consultant that fully discloses their fees up-front and then works their hardest to find you the best loan program. Also, have an idea of what your credit score is and what a reasonable interest rate is based on that score. There is a website you can visit to find one of these interest rate estimators based on your credit score: http://www.myfico.com |
