As a 21-year veteran of banking and mortgage, I am frequently asked about the status of current rates. The answer should always be tailored to the buyer’s objectives.
Mortgage rates can be quoted with or without origination fees, with the understanding that as the fees decrease the rate increases and vice versa. This is an important concept, as the initial enticement of lower closing costs, which would be beneficial if you were planning on paying off the mortgage sooner, may not be advantageous in the long term if you are keeping the mortgage for a normal time frame.
Recently, I received a call from a fellow mortgage officer outside my current organization, and I was asked about our current rate for the 10-1 adjustable rate mortgage (ARM). Here is an excerpt of the call with an analysis of the numbers below.
Mortgage officer: What is your rate today on a 10-1 ARM?
My response: Currently, the rate is at 3.00 percent.
Mortgage officer: Wow, that is a great rate. But wait, are you charging an origination fee?
My response: Yes. In this case, the origination fee is 1.000 percent of the loan amount charged as a closing cost*. Do you only quote your client rates without an origination fee?
Mortgage officer: I do not quote a rate with an origination fee. My clients do not like to pay origination, and I do not want to upset them.
* Normally, origination fees and discount points are similar because they are percentage-based fees.
Discount fees are additional “points” that are charged above and beyond the 1.000 percent origination fee to lower the rate. It is possible in some cases to request a higher rate with a lender credit which could offset the origination fee and depending on the loan program pay other fees as well such as lender and title fees.
There can be good reasons to opt for the higher rate (lower cost), such as when you know that you’re paying the mortgage early (such as when another home sells). For most home buyers, however the lower rate option is a better solution as they will save more money over the life of the loan.
Let’s take a closer look at an example. Your clients are looking at a home with a sale price of $1 million, and they will be paying $200,000 as their down payment. After reviewing their options, they decide to go with a jumbo loan program with a 10-1 ARM and a mortgage of $800,000. Below is a comparison of the interest rate with and without the origination fee.
Sale price: $1 million
Down payment: $200,000
Program: 10-1 ARM
Interest rate without origination fee: 3.500 percent (this option saves $8,000 in up-front closing costs)
Interest expense over 10 years: $250,498
Balance after 10 years: $619,419
Interest rate with origination fee: 3.000 percent (this option has $8,000 higher up-front closing costs)
Interest expense over 10 years: $212,898
Balance after 10 years: $608,159
Difference in interest expense: $37,600
Difference in up-front costs: $8,000
Difference in the balance: $11,260
Net Savings with lower rate: $29,600
Increased equity with lower rate: $11,260
After accounting for the lower costs up-front, the higher interest rate option would cost the homeowners roughly $30,000 over 10 years.
Are you asking the right questions?
It is vital that mortgage lenders take the time to truly learn and understand their clients’ objectives. This simple question can really guide the lender and the home buyer toward finding the best plan. What might seem like an up-front benefit by having a lower cost ends up being a bigger burden later. Over the years, I have learned that my clients should receive all the necessary information, which includes a thorough review of their options. This way they can make a more informed decision.
Mark Drew (NMLS# 595322) is a Vice President and Production Manager for Amegy Mortgage in San Antonio. He has been recognized by the San Antonio Business Journal as a Top Producing Loan Officer nearly every year since 2003. Drew is a past president of the San Antonio Mortgage Bankers Association and currently serves on the finance committee for St. PJ’s Children’s Home. He is one of the few mortgage officers per the San Antonio Business Journal to fund over 400 transactions in a single year. Drew and his team at Amegy Mortgage enjoy serving their clients with the purchase, construction and refinance of their homes. For more information, please contact Drew at 10001 Reunion Place Blvd., San Antonio, Texas 78216, by phone at 210-343-4441 or email email@example.com.