October 16, 2017
Last week we discussed how autumn is a great time to buy a home. Orion’s brokers, and our AEs, are often asked, “Why are there different prices for the same loan?”
The answer is dependent upon choices a borrower makes for the transaction and their current financial picture. Our broker’s clients can choose to have a lower interest rate and monthly payment, or, have a lower cost for their transaction and cash needed to close by having a higher interest rate and therefore higher monthly payment.
For example, Orion offers a no-cost refinance. The base costs for refinances are approximately $3,000 to cover loan fees, escrow fees, title fees, recording fees, etc. In the case of a no cost refinance, Orion pays the fees. In return, the borrower pays a higher interest rate. As the interest rate increases, lenders are paid what is called a rebate, or yield spread premium, for the higher rate. This premium from the higher rate is used to pay the loan fees on the transaction. In other words, “no cost” refinances, translate too: there are costs but they will not be paid by the client in cash but rather will be paid for by a higher interest rate.
Our brokers know that not all loans are the same, and neither are the borrowers – mostly due to perceived risk and history. Because of this, there are pricing adjustments for different factors in a mortgage file and factors such as FICO scores, type of property, type of transaction, and loan-to-value can swing the overall cost of the transaction considerably. A borrower with 800 FICO scores purchasing a single-family residence with 30% down payment getting a $400,000 mortgage will not get the same rate at the same cost as a borrower with 640 FICO score purchasing a condominium with 20% to use as a rental with a $400,000 mortgage. Since the investment condo buyer is a higher risk his cost for the same rate will be higher.
Our AEs remind brokers that when researching their mortgage make sure the definitions of "no-cost" are the same for everyone you may speak to, some include third party fees such as escrow and title and others do not. Ignore the terminology and get information on what a client’s cost out of pocket, or added to the loan amount, will be for what rate.