Pricing: How Do You Know What Price is a Good Price?
How Do You Know What Price is a Good Price?
The cost for a loan (called "pricing") can differ widely. You should review the costs being proposed by the lender and broker and decide if the price is a good price.
There is no fixed price for mortgage loans, and getting cost and pricing information may be difficult. You may have to work hard to find out all the information that makes up the price and to make sure it doesn't change.
How and Why Does My Credit History Matter?
Lenders may categorize loans – and the price of loans – based on credit history.
Subprime loans are intended for people who have less than a perfect credit history when they apply for a loan. Sometimes subprime loans are called "B" "C" or "D" loans. Subprime loans are priced higher and are likely to cost you more. Prime loans are intended for people with a better credit history. Sometimes prime loans are called "A" loans. Prime loans are generally priced lower and are likely to cost you less. Some lenders offer both subprime and prime loans; others offer only prime loans or subprime loans. Also, every lender uses a slightly different yardstick for measuring "prime" and "subprime." They will look at many of the same things, but will use them in different ways. Some of the main things that lenders look at include:
- Your credit score (sometime called a "FICO")
- How many times you have been reported late on other loan payments
- Whether you have filed for bankruptcy in the past
- How much debt you already have
- Whether you have paid your bills on time
- Whether you were late in paying or missed payments on a previous home loan.
You may want to obtain a copy of your credit report before you begin shopping for a loan. http://www.annualcreditreport.com. The information in your credit report can affect the cost of your credit (that is, the price of your loan). If you have any questions about your credit report, contact the creditor or the credit bureau(s). The information in your credit report should be correct.
What Costs are part of the Price?
To determine if the loan terms presented to you will give you the best priced loan for your personal circumstances, you should compare all of the following and choose the lowest "price" offered to you:
- Annual Percentage Rate (APR)
- Broker Compensation
- Credit Insurance
- Term of the Loan (for example, 30 years (360 months))
- Balloon Payment
- Prepayment Penalty or Charge
- Loan Features
Keep shopping until you are satisfied that you have the best priced loan for you!
Annual Percentage Rate (APR) The APR is the "annual percentage rate" of the loan. It is a number to help borrowers compare the cost of loans from different lenders. The APR puts the interest rate, points and some of the other fees into one combined number, so you can compare loans more easily. The higher the APR, the more costly the loan.
Comparing APRs is better than just comparing interest rates. Even so, many of the fees you have to pay are not included in the APR, so you have to compare both the APR and the other fees to be sure you are getting a good price.
Points "Points" are an amount (cost) that you pay to the lender when you get the loan. Each point is equal to 1% of the amount you are borrowing. You may pay the points in cash or finance them as a part of the loan amount.
Fees Other fees will be charged when you borrow the money. The lender keeps some of these fees and pays some of them to others who assist in making the loan. You can look at the Good Faith Estimate to get an idea of what fees will be charged and who will receive them. If you can't tell what fees will be charged or who will receive them from the Good Faith Estimate, you should ask.
Some of the common fees you may be charged that will be paid to third parties include: appraisal; credit report; tax service; flood determination; title abstract, search, and examination; title insurance premium; settlement; attorneys; pest inspection; survey; recording fees; and government taxes.
Some of the common fees you may be charged that will be retained by the lender (in addition to points) include: underwriting; processing; document preparation; courier. If a mortgage broker is involved, there will be fees for the broker's services as well. Some lenders and brokers may charge an up-front application fee at the time of application. Not all lenders charge all of these fees. You may want to negotiate these fees with your lender or shop for a lender that charges fewer or lower fees.
Mortgage Broker Compensation If you use a broker to help you find a loan, the broker will be compensated as a part of the loan transaction. Sometimes that compensation is paid directly by you in the form of cash or it may be included in your loan increasing the total amount you borrow. Sometimes it may be paid by the lender. Sometimes it is paid partly by you and partly by the lender. You are entitled to know the total compensation your broker will receive in connection with the loan.
A payment from the lender to the broker is called many different things, including "yield spread premium" or "YSP" or "servicing release premium" or "SRP". It is best understood if it is called "Lender Paid Broker Compensation". You will not have to pay the lender paid broker compensation directly,but your interest rate on your loan normally will increase to cover the cost of that lender paid compensation.
Credit Insurance This is insurance to pay the lender if you die, become disabled, become unemployed, or other similar events. It is completely optional. There are many types, including credit life, credit disability, credit unemployment, credit property, etc. This insurance is intended to pay your mortgage payments or pay off all or part of the entire mortgage if you meet the conditions-for example, credit life is designed to pay in the event of the borrower's death. The insurance may cover the whole term of the loan or a shorter period of time.
Credit insurance can be purchased from the lender either as: (1) a monthly charge that is added to each monthly mortgage payment or (2) as a lump sum that is charged upfront and is generally added to the amount of your loan (sometimes called "single premium insurance"). You will pay interest on the lump sum insurance throughout the life of the loan. In general, borrowers can cancel either type of policy at any time during the mortgage loan.
Ask yourself if you really need credit insurance. You may already have enough insurance to protect your family in the event of death, disability, or unemployment. If not, you should shop for insurance purchased outside of the mortgage transaction, which may be a better value.
Term of the Loan (Loan Term) The "term" of the loan is the length of time you will have to pay back the loan. The longer the term, the longer you have to pay back the amount you borrowed but the longer you will be paying interest (so it might cost more). Beware that if you fail to pay certain amounts during the term of the loan (for example, you incur late fees but don't pay them) you may find that a larger amount is owed at the end of the term.
Balloon Payment A balloon payment is a scheduled payment that is substantially greater than your regular payment amount and will be due at the end of the loan term. A balloon payment arises when your regular loan payments, when spread out evenly through the entire term the loan, do NOT pay off the loan entirely. A loan with a balloon payment will let you make lower regular payments BUT it will have a very large payment due at the end of the term. For example, in a balloon-payment loan, you will make regular monthly payments as though you have a 30-year loan, but after 15 years, the loan term ends and a very large payment is due.
Prepayment Charge A prepayment charge (sometimes called a "penalty") requires you to pay an amount of money (sometimes a large amount of money) if you want to pay off your loan before the loan is due. If you are not expecting to refinance or prepay your loan for a long time, then a prepayment charge should not adversely affect you and, indeed, might get you a lower interest rate. However, if you believe you want the loan only for a short time (for example, you believe you will want to refinance your loan if interest rates decrease) then this could be a bad term to agree to in your note.
Loan Features Whether the loan is fixed rate or adjustable can significantly affect your costs. A fixed rate loan may appear to be more expensive, but an adjustable rate loan is unpredictable and the costs can be significantly higher than a fixed rate loan when, for example interest rates are rising. It is also important to consider whether other features, such as interest only or payment option raise the total cost of the loan as compared to a fixed rate loan. It is important to ask whether the rate charged on the loan is based on your income and assets (full underwriting) or not (low or no documentation underwriting). Low and no doc loans generally charge higher interest rates than fully underwritten loans.
Beware of any loan that has a future payment that you cannot afford when you close the loan.
If your loan is low or no doc, be sure you really have enough income to make the payments. If not, this loan is not for you. Be sure that the credit application you sign when you apply for the loan and when the loan is closed is truthful and accurately states your income.