Friday, June 27, 2008

Mortgage Lending: What’s Your Point?

When considering a mortgage, oftentimes a borrower is perplexed by the question of whether to pay a “point” for a certain interest rate offered by their lender. What exactly are points and when should you pay them?

Buying a home is a confusing process, and one of the most confusing prospects is settling on an interest rate. Even when you decide what type of loan you want, you find you still have options as to what rate to lock. Some of these options stem from whether or not you buy down the rate by paying a point. A point is a fee that equals 1% of the loan amount. For instance, if you are buying a $100,000 home, and your note amount is $97,000 (because you’re putting $3000 down), a point would cost you $970.

You can see the points you are being charged on line and 802 of your Good Faith Estimate, and later, on the same line on your HUD-1. This line item reflects fees known as “discount points”, but they truly aren’t interchangeable with origination fees (line 801) even if they sometimes serve the same purpose. If you choose to pay a discount point, you should expect a lower rate than if you didn’t. So, if you’re quoted a rate of 6% 0 + 1, you are paying 1 discount point. If the quote is 6% 1+0, you’re paying an origination fee. And 6% 0+0? You’re paying no fees in either form.

What’s the difference between an origination fee and a discount point? Well a few things. Technically, an origination fee is what you pay the lender or the organization that takes the initial application and processes the loan. A discount point is specifically paid to the lender to buy down or permanently lower the interest rate, and it’s usually a percentage of the loan amount. You can also pay additional points to buy down your rate, not just a flat 1%. You can pay a .5% or 2%. It just has to make good economical sense for you. And it shouldn’t be robbing you blind.

From a tax standpoint, there isn’t much difference. An origination fee is generally tax deductible as long as it’s charged in the form of a “point” or percentage of the loan amount. However, you may ask your lender to charge you a discount point versus an origination fee to keep things neat and simple. Sometimes mortgage lenders charge you an origination fee when technically they should be charging you a discount point. But they’re collecting all the fees anyway and happen to be giving you a lower rate. It really matters most if you are working with a mortgage broker. Mortgage brokers can’t be paid discount points, only origination fees or broker fees. They can collect discount points to lower your rate, but the discount point has to be paid to the mortgage lender with whom they’re doing business. And, this information should be disclosed properly on your Good Faith Estimate

A typical trade off is that a 1% discount point equals about .25% reduction in interest rate. You should be able to easily decipher whether or not it’s worth it to buy your rate down. How long do you plan to be in the home? If not that long, then maybe you should think about a 0+0 quote. If it’s your forever home, then dipping into your wallet and footing higher closing costs might be worth it in the long run.

However, if you look at your Good Faith Estimate and it seems you’re paying too much in origination fees and/or discount points, then you probably are. Say something to your lender. And if he doesn’t budge, you may want to look elsewhere. Go with your gut instinct or call another reputable lender and get a second opinion.


Let My Experience Work For You!
Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at or call direct: (865) 567-0113 Toll Free: 1-800-489-8910. For more information visit her website at Home Loans Plain Talk.

Sunday, June 22, 2008

Call the Movers! You’re Closing Date is Extended!

Sometimes loans don’t close when they are supposed to close. It’s usually not your lender’s fault. What exactly can cause your loan closing to be delayed?

You’ve called the movers, you’re all packed, and it’s the eleventh hour before closing. Your phone rings and it’s your lender with bad news. Your loan’s not going to close tomorrow. Whatch you talking about, Willis? Everything’s ready, the utilities are being turned off tomorrow, and the movers are showing up! Why is this happening?

There are so many moving pieces to a puzzle of a loan closing. Everything has to be coordinated to make it go smoothly. For instance, get the requested documents to your lender as soon as possible. If you dilly dally, you may run into problems. You see, your lender has a whole pipeline of loans, as do all the other mortgage lenders that work for that particular company. All of these loans have to be reviewed by an underwriter. So, basically, your loan has to take a number. And if you’re not prompt, your loan may go to the back of a very long line. Most people want their loans to close at the end of the month, so you can imagine the huge glut and back up that occurs. Thus, be prompt and responsive to your lender’s requests to allow everyone time to do their job.

Also, don’t quit your job and expect to close because your approval depends on you receiving proven income. On the day of closing, a lender is going to make a call to ensure you’re still employed. Funny, but your ability to repay the loan is important when someone’s fronting you thousands of dollars. No job, no moola.

If you’re a seller, be sure you’re ready for that final walk through. If the buyers are expecting you to leave the bathroom mirrors and the curtains, then don’t pack them up. The house should be broom clean (unless otherwise noted in the contract) and there shouldn’t be any new damage or sudden repairs needed that previously didn’t exist.

Weird things can happen, too. I know of a loan that was delayed in closing because two days prior to the deadline the title company found out that the builder/seller had filed bankruptcy. It seems that he was not in a position to sell the home anymore, and he failed to tell anyone (however, the new owner who got the property in bankruptcy was happy to sell, but closing was delayed). Another odd tale was that of the seller who failed to disclose he had a $49,000 tax lien outstanding on a property. He didn’t feel it necessary to mention this situation to anyone. It was pretty much a deal killer, as you can imagine.

Another thing that can cause a hiccup is failure to alert anyone that that one of the parties (buyers or sellers) will be out of town for a closing. These situations aren’t insurmountable, but they require careful planning and coordination. Sometimes, the contract changes and the lender isn’t notified until after the loan is fully underwritten. Contract changes most usually require a loan to be shot back through underwriting. Remember, you get in the back of the line.

Another minor hitch that frequently occurs involves self employed borrowers. The lender takes a loan application over the phone and writes down the borrower’s income. When tax returns are collected, the lender comes to find out that what their borrowers earn isn’t exactly what they claim with Uncle Sam. A lender will almost always use the income you report to the government, not what shows on your bank statements. All of a sudden, the borrower is no longer income qualified to close the loan. Time to scramble.

The moral of the story is to listen to your lender and keep an open line of dialogue going. Keep the him/her aware of changing situations. Email is great tool for use in accomplishing this purpose. It takes only a minute or two and can save everyone lots of heartache in the long run.

Let My Experience Work For You!
Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at or call direct: (865) 567-0113 Toll Free: 1-800-489-8910. For more information visit her website at Home Loans Plain Talk.

Monday, June 2, 2008

Mortgage Charges: What MERS and a Microwave Have in Common

I’ve talked about all the different charges you see on your Good Faith Estimate. Where does all this money go, and what’s it for? In particular, what on earth is MERS?

As you’re sitting across from your mortgage lender who is going over, line by line, the charges and fees associated with your loan, he/she mentions MERS. It’s only costing you $4.95, so you don’t pay particular attention to it. I mean after all, $4.95 is nothing compared to the state tax stamp fee or other line items you see. But, aren’t you curious as to exactly what MERS is? At face value it sounds like something you should get an inoculation to avoid. But in actuality, it’s a little system that has revolutionized the mortgage industry.

MERS is kind of like a microwave. You never knew how much you depended upon it until you consider taking it away. Seriously. Our microwave was broken for a short period of time, and I couldn’t believe how much we used it or how much it simplified our lives. Half the food I cooked became a real trial to prepare the old fashioned way. Not to mention heating up leftovers. Ironically, it’s a very similar situation for the mortgage industry if they had to do away with MERS all of a sudden. It would be perplexing, annoying and time consuming.

MERS stands for Mortgage Electronic Registration System. If you visit the MERS website (, you can read their overview: “MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. Our mission is to register every mortgage loan in the United States on the MERS (registered trademark) System.” Nice. Everyone likes paperless systems these days.

In the old days, if you sold a loan on the secondary market, you had to assign the mortgage to the new buyer. You created a paper assignment and recorded it at the courthouse. If there was an error on the assignment, you had to correct it (have it initialed by the appropriate parties) and re-record it. Then you sent this original recorded document to the new buyer for them to keep. If they in turn sold the loan, they had to prepare another assignment, record it and forward it, along with the first recorded assignment, onto the new buyer. And so on and so forth. Lots of paper being printed, recorded, regenerated and reconstituted. MERS came up with a fabulous system to eliminate this nightmare. Now, when you sign a mortgage, MERS assigns a unique identifying number to that mortgage. The lender, upon closing, registers the loan with MERS to show it exists. Then, any transfers can be done electronically. The mortgage servicing and mortgagees can also be tracked electronically, which allows for title searches to be streamlined. It’s a beautiful thing. This system has saved a lot of time and energy for the industry.

However, if you were to tell a mortgage operations person that MERS was going away, and they were going back to paper assignments, it wouldn’t go over well. They would probably be at a total loss. Sort of like tossing someone a bag of popcorn and telling them to cook it without a microwave.

Let My Experience Work For You!
Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at or call direct: (865) 567-0113 Toll Free: 1-800-489-8910. For more information visit her website at Home Loans Plain Talk.