Rates & Closing Costs

The Hidden Truth about Interest Rates

I recently made the decision to care less about being liked by people in the mortgage industry and more about transparency surrounding what I believe. For the sake of this article, I’ll focus on how much a mortgage loan truly costs an average consumer at most mortgage companies vs. what it costs at City Creek Mortgage. Further, I’ll dive into where I see the future of this industry as well as the people who work within it.

First, I want to make clear this is not a dig at my competitors. I believe most mortgage lenders are wonderful people who work for great companies. Just because I have fundamental differences in beliefs about how much companies and people in my industry should earn, doesn’t make my competitors wrong.

The $ Behind a Mortgage

Few consumers realize how much money is made in the process of a mortgage. For many well-known local mortgage companies, a $300,000 mortgage loan generates $12,000 of revenue. What consumers should understand is that this “standard” cost of originating a loan is substantially higher than the actual cost of doing so. The result is needlessly higher interest rates and closing costs for the consumer. Although “it’s just the way things are done,” I believe once people understand what is happening, this practice will come to an end.

In total transparency, a $300,000 mortgage loan closed at City Creek Mortgage will generate up to $6,000 in revenue on average. Although still a healthy income, it is significantly below what most companies make on the same loan. By choosing to make less money on each loan, we save our borrowers in both interest rate and closing costs compared to many of our competitors. Plain and simple, that’s the truth.

As I consider the future of the mortgage industry, I see what many in the industry don’t want to face. Some may disagree with my assessment. I see a time in the coming years where a computer will be able to replace most of the work done by mortgage loan originators. I will explain my thoughts below.

The Impact of Technology

Technology is making the mortgage process significantly easier, faster & more affordable. We are already at the stage where technology can automatically retrieve taxes, bank statements or pay stubs. Since this is most of the supporting documentation required for a loan, the effort required by the consumer and loan originator is decreasing. Further, many loans no longer require a physical appraisal. Once again, expediting the loan process. When combined with digital signing and instant loan approval, it’s not difficult for one to perceive a day when a mortgage loan originator is only needed on more complicated loans. It could even be that a human is needed on only 25% of all loans closed.

A Mortgage Loan Originator’s Income

In truth, the individual mortgage loan originator is usually able to set their own compensation levels. I know many that get paid 2% of each loan they close. This is in addition to what their respective company makes on each loan. For this to work, mortgage companies roll that super high commission into the interest rate they charge borrowers.

So for a $300,000 loan, not only does the company make money, but the loan officer gets $6,000 in commission. For that same $300,000 loan at City Creek Mortgage, $6,000 is the total revenue. No additional charges, or rolling commission into the interest rate like other companies. We use $6,000 to pay 30 staff members, and all our overhead. That’s why (in other companies) you can often get a lower rate by walking through an office and asking individual mortgage loan originators what their level of compensation is. Once you find the lowest plan, you can choose that mortgage loan originator and be offered lower rates and fees. Or you could do it…

The Right Way

You may be wondering how it is possible for City Creek Mortgage to make half of what our competition make on each loan. It is simple. We have a volume-based model. We have to do more loans, because we make less on each loan. We provide our loan officers with the stability of a salary and since they don’t do any marketing themselves, they can do substantially more loans per month than the typical loan originator.

I believe most mortgage loan originators who work for companies eventually will be paid a salary. An individual loan originator will no longer be able to make hundreds of thousands of dollars a year at the expense of the consumer for closing a handful of loans each month. The current system, where borrowers are paying a luxury tax each month for 30 years for overcompensated loan officers is flawed. Further, the real estate agents who claim to want the best for their clients are often the ones feeding the business to these highly compensated mortgage loan originators. It’s just wrong. Consumers shouldn’t be footing the bill for extravagant lifestyles of over-compensated mortgage loan originators. Trust me, it will change.

And that, my friends, is my explanation as to why our rates at City Creek Mortgage are so much lower than our competitors.

A good mortgage company helps clients with all the steps of a detailed process, and at City Creek Mortgage, we’re here to do that for you. Our brokers will take you through every bit of the process, offering advice along the way.

For many people, one of the most important of these processes is the mortgage pre-approval process. What is this, and how can going through it benefit you? Let’s take a look.

Pre-Approval Basics

Pre-approval involves a thorough investigation of your financial profile by a lender – this will include a comprehensive credit check, plus a detailed look at your income and related expenses. The purpose of this check is for the lender to gain confidence that you’ll be able to meet all the financial requirements of a given mortgage rate.

It’s important to note that pre-approval is not the same thing as pre-qualification. Pre-qualification is a much less formal procedure, mostly meant to get a very general introduction to the lender and loan options. Pre-approval involves much more detail and commitment, and it’s rare for someone to be pre-approved but then later denied for a final application.

Pre-Approval Preparation

Before a pre-approval check, your goal should be to get all your finances fully in order to the best of your ability. You can use online tools to check your credit score (there are tools that allow you to do this for free, and without raising the score by checking it). A lender needs a thorough understanding of your finances, so you should have one too.

Documents

You’re going to need a few documents to present to the lender before you can become pre-approved:

  • Personal information: At least one form of identification, plus Social Security information for the lender to run a credit check.
  • Income information: Things like pay stubs, tax returns and W-2 forms for the past two years will be required. If you have any additional sources of income, these will need to be documented as well.
  • Assets: There are some financial assets that don’t count as claimed income, such as certain investments, savings or personal gifts from family or friends. However, you’ll still need to present these holdings for pre-approval.

Want to learn more about pre-approval, or any of our other mortgage services? Speak to the brokers at City Creek Mortgage today.

One of the primary items you’ll be looking at when you come to a mortgage company like City Creek Mortgage is your interest rate. Also called a mortgage rate, this is perhaps the largest individual financial factor involved with most mortgages.

Do you have any control over getting the best mortgage rate possible? Absolutely. Let’s look at a few of the main factors that influence interest rates, and how you can use them to get the best deal possible.

Market Factors

Maybe the largest factor for many people is the market as a whole, which can fluctuate based on several complex economic factors. These factors are outside any individual control – the best you can typically do here is keep a keen eye on the market and look for opportune moments to get the best rates. At City Creek Mortgage, our brokers can give you some great industry tips on factors that might cause future markets to raise or dip.

Size of the Loan

For the most part, a larger loan amount will equal a higher interest rate. The lender is taking a higher amount of risk by loaning you a larger amount, and the higher mortgage rate reflects that.

Loan Type and Length

The two primary loan types for most people are adjustable-rate mortgages and fixed-rate mortgages. Adjustable-rate mortgages tend to have lower starting rates, but note that these can raise during the period of your loan if the market dictates it. Fixed-rate loans generally have higher starting interest rates, but you get the security of knowing they’ll never go up.

The length of your loan is also important. 10- or 15-year terms generally come with lower rates than 30-year terms – again, it’s just about risk for the lender.

Down Payment

The more money you can put down up front to minimize the lender’s risk, the better rate they’ll give you. Some lenders will require a 20 percent down payment for certain types of loans, though this isn’t always a hard and fast rule.

Credit Score

The factor you have the most individual control over is your credit score, which can get higher or lower depending on your success paying down various forms of debt. There are certain types of loans you can’t even be approved for without a certain threshold credit score, and for many others, credit score will be a huge crux point for your final interest rate.

Want to learn more? Contact the expert brokers at City Creek Mortgage for more information on any of our mortgage solutions.

City Creek Mortgage has access to the lowest interest rates available in the country. However, this is a privilege that is only available to those considered as top tier borrowers. Furthermore, the loan process to obtain the lowest rate is often more difficult and time consuming to the borrower. Based on our review of your file, you fit within the criteria to obtain the lowest rate. However, we want to make sure you are willing to help us through the process of the extra verification and scrutiny that will be required.

What is Required from the Borrower to Achieve the Lowest Rate?

First of all, we don’t want to make this sound more difficult that it truly is. Generally speaking, most loans flow through this process without much extra effort. However, in some cases, we have found more required in the following areas:

  • A full two years of taxes are required
  • Unknown deposits on a bank statement must be explained and documented
  • Appraisals take longer to complete
  • Extra explanation may be required for income or job history
  • We are subject to the underwriter’s time-lines – no rushes allowed
  • Appraisal reviews and extra property scrutiny

Assuming you are willing to put in the extra effort to achieve the lowest rate, know that we will use our years of experience and expertise to help make this process as smooth as possible. We are your partners in this process and will work diligently and quickly to get your loan closed with as minimal effort as possible. When we call to ask for something that seems absurd, just remember this explanation and know that the reward will be the lowest interest rate available in the market.

Are there Alternatives?

We recognize that some would rather pay a slightly higher interest rate and have the smoothest mortgage process possible. If this fits your situation, please let us know. Our goal is to ensure that your needs are met and your final goals and objectives are obtained.

If you have any additional questions, please let us know. We are always here for you.

Until the interest rate is locked, the credit you receive (or the price you pay) for an interest rate can change minute by minute.  Once your interest rate is locked, as long as we close your loan within the allocated lock period, your interest rate and credit are secured.  Now, rather than worry about what is happening in the interest rate market, the focus will change to ensuring your loan closes within the allotted lock period.

Interest Rates and the Media

Between now and the time that your loan closes, you may hear the media talk about interest rates rising or dropping.  The truth is that the interest rate is not likely moving; but rather the credit or the cost to achieve that interest rate has moved.  In most cases, the change is minimal.  The media is very quick to alert their audience when mortgage pricing improves, but slower to act when the cost to achieve a particular rate increases.  In many cases, they will announce that rates are lower.  However, that may indicate that rates have decreased and are now back down to where they were a week ago.  Not truly a noteworthy headline.

What if Rates Drop after the Rate is Locked?

Generally speaking, once your interest rate is locked the pricing is set.  If there is a significant drop in interest rate (.25% or greater improvement), there are times when a rate lock can be adjusted.  However, we will always lock in a rate based on the best executed price for your situation.  Therefore, assuming the next best plan is .125% lower than the next best option, a rate movement of .375% is required before a change can be considered.  This is highly unlikely to occur within any lock period, and is not always an option regardless.  Therefore, the safe play is to consider your rate lock final once the pricing and interest rate have been locked in.

It is better to be locked and wish you were floating than be floating and wish you were locked.

Is a Rate Lock Final, Regardless of Loan Approval?

In order for a rate lock to be considered final, the loan must be fully approved.  If the lender with which we have locked in your rate denies your loan for any reason, the interest rate lock will be null and void.  If we are able to move a denied loan to another lender and get the loan approved, we will have to relock the loan based upon the market at that time.

Can Pricing for a Rate Change Once Locked?

The cost (or credit provided) to achieve a particular interest rate can change based upon credit score, loan-to-value and loan amount.  If there is a deviation from the original plan in any one of these details, the cost or credit for a particular interest rate can change.  The most common example is when an appraised value comes in lower than anticipated.  This may make the pricing for a particular interest rate higher or lower.  We will advise you should this become an issue with your loan. If you have any other questions, please let us know.  We are always here for you.

Unless your interest rate is locked, the interest rate that is stated on your application does not necessarily reflect the current market interest rates.  Because interest rates fluctuate from one day to the next (sometimes from one hour to the next), it is not possible for us to predict where interest rates will be at the moment that we lock in your rate. Therefore, we typically use a rate that is slightly higher than the rates that are currently available. This is only so that we do not have to re-underwrite your mortgage in the event rates increase before your rate is locked. (One source to track national average interest rates and trends is www.freddiemac.com).

As Professional Mortgage Planners, our goal is to ensure that you have the lowest cost of your money over the anticipated life of the loan.  As part of that, we will analyze the difference between rate and fees, and determine at what level of closing costs we suggest you pay in order to minimize the overall cost of the loan. Remember, the lowest rate on the wrong program can cost you thousands of dollars more than a higher rate on the right program.  As professionals, we will always advise you based upon our extensive understanding of mortgage trends and interest rate vs. fee options.  We seek to earn your trust and understanding that we will always make recommendations that are appropriate for you.

As part of our jobs, my team and I spend a significant amount of time studying the current market trends and likely changes.  With the help of live bond tracking, as well as advice from advisors that we hire, we are pretty accurate at predicting short-term market changes. By using this knowledge to recommend when to lock a rate vs. float, we can potentially save you thousands of dollars over the life of the loan.  The key to this is to be prepared to make a quick decision in the event that we see an adverse change in the market.  All too often, we will make a recommendation to a client to lock and they will need time to consider the decision.  By the time they are ready to commit to a rate lock, the opportunity is often lost. Mortgage rates are not stable like car loans or home equity loan rates.  We want to ensure that you are ready to make a decision to lock if we see an adverse change in the market.

Another benefit of using City Creek Mortgage is for our access to the lowest cost money available. You never have to worry about shopping around for the lowest rates. We take care of that for you. We know which banks and mortgage companies are offering the lowest rates at the time, and we will ensure that we are placing your mortgage with the best offering at the time. Furthermore, because interest rates can change from hour to hour, shopping for the “lowest” interest rate is a waste of time. Shop for a lender you trust, not for interest rates.

Lastly, we greatly appreciate you and look forward to serving your mortgage planning needs for life. You can rest confidently knowing that your mortgage will be managed by a team of professionals who are committed to ensuring that we not only help save you thousands of dollars by having us manage your mortgage, but that we also are helping to empower your family and increasing your net worth.  You will never have to worry if you are in the best mortgage based on the current market conditions, or whether you are working with an honest, ethical and purpose-driven company. As long as you are a part of the City Creek Family, you will never have to worry about your mortgage.

When structuring my client’s loans, I will typically recommend loan strategies with little if any closing costs.  Depending upon loan size and other factors, a no-cost loan may not be available.  However, a loan strategy where a significant portion of the closing costs are credited back to the borrower is most often an option.

I’m often asked how it is possible to refinance a loan without paying all of the closing costs.  A loan with limited closing costs seems too good to be true, so many become skeptical.  Below is a detailed explanation of how a Low-Cost loan works and the benefits it offers.  (NOTE:  City Creek Mortgage does not charge you any closing costs.  We are 100% compensated on a fixed income basis by our investors, not by our clients.)

A Low-Cost Loan Explained:

There are always fees associated with doing a mortgage.  Appraisers, title companies and underwriters all require  payment for their services.  On a typical $165,000 mortgage, the total for these is approximately $2,366.  Then, there is either a cost or a credit associated with each interest rate.  For example, , and a 4.125% interest rate may offer a credit of 1% of the loan amount.Alternatively, there are also interest rates that offer a credit.

Therefore, with a $165,000 loan, you will pay the following:

A 3.75% interest rate may have a cost of 1% of the total loan amount.

Basic Closing Costs $2,366
Cost for interest rate of 3.75% $1,650
Total Closing Costs $4,016

A 4.125% interest rate may offer a credit of 1% of the loan amount.

Basic Closing Costs $2,366
Credit for Interest Rate of 4.125% ($1650)
Total Closing Costs $716

 

Difference in close costs:  $4,016 – $716 = $3,300

 

The Benefits of a Low-Cost Loan:

When comparing a loan where someone is paying a higher level of closing costs to achieve a slightly lower interest rate, the loan amounts must be adjusted to reflect equal cash needed at closing.  In other words, if there is a difference in loan costs between the two options of $3,300, the Low-Cost option will have a loan amount that is $3,300 lower.  That will most effectively show the true cost of paying a higher level of closing costs to obtain a lower interest rate.  Therefore, we would compare a balance of $168,300 at a rate of 3.75% vs. a loan amount of $165,000 at a rate of 4.125%.  The results are as follows:

Full-Cost Option:     $168,300 @ 3.75% has a P&I payment of $779.42

No-Cost Option:     $165,000 @ 4.125% has a P&I payment of $799.67

By paying an additional $3,300 in closing costs, the monthly payment will be $20.25 lower than the Low-Cost option.

Therefore, the breakeven point is 162 months ($3,300 / $20.25 = 162.96 months).

If the loan will be in place for at least 13.5 years, then paying the fees for the lower rate may be the best option.  However, that is very rare and does not account for the option to move the rate lower again should interest rates continue to fall without losing the significant amount of closing costs paid for the loan.  Nor does it take into consideration the additional tax benefits the higher interest rate of a Low-Cost loan offers.