As I often hear, “it is a hard job but somebody has to do it.” But I can make it easy for you, however it will take some reading.
If you do not take the time to learn the basics provided by my mentoring and coaching, and make the decisions on loan configuration and how to structure your transaction then some else will. I assure you they will be very willing to do that for you, but will most likely be in the interest of the lender and or the loan officer or a combination, but not yours. Then you will most likely not be happy with the end result. I am not saying that all other people in my industry are dishonest, but the best case would be someone will be honest and fair but project their value system as the frame of reference rather than yours. This should be about catering to your values and about meeting your objectives.
If you read other parts of my website my theme is “you are the best financial advisor in the world for you and truly the only person who has your best interest at heart”. The purpose of me helping you do your mortgage is to get you as a client for the long run with my role as the professional who shares and teaches you the technical knowledge you need to make such decisions. Then I am also a resource and place to acquire the financial instrument product (thus how I get paid). In this case that will be some sort of mortgage.
To get this knowledge read these sub pages in the order displayed from the top down because I have designed them like building blocks. I suggest starting with first reading through them once and then cross referencing them. I am sending you back to read first, the “Mortgage Refinance Terms” on the prior page which I have also tried to put in the order of the transaction timeline to tell the story and help you understand the flow better. The explanation of Proposal is a very important one so please be sure to read that one to understand what you will be receiving from me after sending me your current mortgage statement. That is three or four transaction configurations scenarios each having a different Rate Fee Blends. These options if you will we will cross reference or compare them with your objectives once we clarify them. We will go over these on the phone, line by line and you will be about to understand better why I use the wording I do. While I never guide the customer to one of them I enjoy explaining the consequences of each against the objectives and goals that they have shared with me for themselves and generally it becomes self evident which will work best for them. After my potential client shares what they like and dislike about each I will do a fourth more custom one to optimize the structure, configuration and Format. If they are still on the fence for preference then I will share which I would do if I were them based what they shared as their objectives and why which generally is helpful.
The key thing here is to understand all mortgage loans have core closing cost. How the file is configured determines who pays for those closing cost. How the file’s format determines who pays the compensation of the broker. Unless I tell you otherwise, all the proposals I will share with you will but of the “Lender Paid” format. Everything has a Yin and Yang, meaning there is no free lunch. The structure determines who has certain benefits and who takes certain risk.
I will start by teaching you my names for the four file configurations (combinations of them are often used). As you learn these you will start to understand more clearly the four ways closing cost can be paid. I will call them A through D. (Then I will expand on each for more details and it will get real clear).
A- The, “ Bring the closing cost money to escrow” as a use of money for opportunity.
B- The, “ Build the closing cost money into the interest” over the next 30 years” opportunity.
C- The, “ Build the closing cost money into the loan amount over next 30 years” opportunity.
D- The, “ Build the closing cost money into the sale price of the house” opportunity.
None of the above are right or wrong or better than or worse than the other UNLESS they are not match and synchronized to the needs, goals and objective of the borrower’s situation.
My experience and observation is that from a practical point of view they are rarely matches, or directly synchronizes with the borrowers goals and objectives. This is because of the three reasons:
Generally, the borrower is not clear about their situation, goals and objectives other than to reduce the payment or get their hands on cash.
They do not even know that all the configurations models and loan structuring even exist so why would they thing of controlling the configuration and structure to match their objectives which they are not even clear about.
I have seen only a few Loan Officers in their busy day take the time to teach borrowers this complex subject. Because of that regulators imposed the new Anti-Steering Disclosure to require banks and mortgage companies to provide the three quotes on one page, but in real life it is just thrown in a huge stack of pages to sign the application time, that no one really even reads.
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After talking with enough people and doing enough proposals to close over 1,300 mortgages I have heard and experienced almost everything. Since, and when the public does not understand these subjects sales people manipulate these configurations to make their product look more attractive than their competition and it may not be.
So let us explain the matrix one level and see some details by viewing below:
FYI: NRCC = Non Reoccurring Closing Cost as in onetime cost, not counting taxes & insurance.
A- The, “ Bring the closing cost money to escrow” as a use of money for opportunity.
First this is always none when you purchase a home as part of Settlement Charges.
This keeps the loan amount lower on a refinance and because there is NRCC’s (as indicated above)
the note rate will be lower; as compared to building the NRCC’s into the rate like in “B” below. One
could say this is paying your NRCC’s “out of pocket.” It would be considered buying the rate down.
B- The, “ Build the closing cost money into the interest” over the next 30 years” opportunity.
The lender provides us a credit which we use to pay closing costs, you choose the rate and if
If you want to select a lower rate, then the credit will become lower and lower with each
tick of lowering note rate, once there is no credit, then the borrower is paying all of the
core closing costs. If the borrow wants to keep lowering the rate that is fine but now the
credit inverts to a fee called a “discount fee” and that amount of fee gets higher and
higher as the rate drops. This month the market is offering note rates under 3% but the
discount fee added to the normal core closing cost, making them much higher and
therefore really increases the APR. On the other side of the coin, the other option and for
a more clear explanation is the higher you increase the note rate the larger or greater the
credit will get, since the credit passes through to you to pay your NRCC’s the lower the
closing cost that you pay out of pocket or out of equity will become. This scenario is popular
when there is lower equity, little cash in the bank or the the time horizon of future ownership
is short. It is the opposite of “buying the rate down.” When using this configuration scenario
with the higher rate the payment is higher which may challenge the underwriting income and
debt ratios seeking loan approval, a little, but if you are a strong borrower this is nothing to
worry about. In part, I see this configuration all the time with or on VA loans. It is common
household knowledge that a Veteran can close in escrow on a new home with as little as
$45.00 out of pocket. Army Recruiter sales people push this as benefit that is special. That
statement was only associated with their closing cost aspect of their transaction. I have read
employee hand books of people who work for Bank of American, Chase, Homestreet Bank,
and BECU and I see this configuration concept used and billed as a special pricing for their
bank employees. But they close with me because once they understand that the only two
things that really count are the acquisition price (the cost of all line items added up) and the
Note Rate that controls the payment amount per month, they knew how to compare.
Although it is not legally correct, I often hear out on the street this being called our, “no
closing cost program”. Once I heard a bank manager say to a potential customer, “because
you know Fred, we will waive our loan origination fee for you.” That is an example of a
small example of false communication and a little misleading. This is especially true since
the customer/borrower is the one who should be choosing the loan configuration and
format. But since they do not understand that the sales person/Loan officer stacks the
information for presentation purposes.
C- The, “ Build the closing cost money into the loan amount over next 30 years” opportunity.
This is paying closing cost out of equity, and since you can almost make the closing cost
as has high as you want seeking the lowest rate and payment, it is “buying the note
rate down” but not with money out of pocket, but with your home equity, which I call
“equity erosion”. I just Googled “soil erosion” to double check the spelling of “erosion” it is
the same thing be rather than involving your soil it is lost of net worth, that we call equity
but on the bright side this came to you normally from newly found appreciation in the
property’s value. The good news about it is you never have paid income taxes on this gain like
you did with the money that is in your bank account. Also, markets go up and down and
the equity may be there now but this may not be there in the future, and the rates may
not remain low either for that matter. Although I sure it is not a legal term, out on the street
I hear this referred to as “rolling the closing cost into the loan.”
D- The, “ Build the closing cost money into the sale price of the house” opportunity.
This will be a good review, but does not apply on a refinance. It is not quick to understand,
and few do, including most real estate agents, ironically. The “structuring of the transaction”
has the EM offer asking the selling to pay for your closing cost within certain parameters
rather rather than asking for the price of the property reduced. The wording in the offer may
be something like this: “The Seller to pay up to 3% of the purchase price for NRCC’ and
allowable pre-paids.” Again everything has a yin and yang, or pro and con. The funds to
close is far reduced by approximately the amount of the closing cost. But the loan amount
is larger or more for the next thirty years by about the amount of the closing cost. Therefore
the payment will be higher too. But this maybe the difference of owning a home or not.
It could be the outcome of that home would be $70,000.00 higher by the time you saved up
the additional $7,000.00 of funds to close.
Often, first time home buyers will use a combination of these configurations to reduce funds
to close to become an owner.