Is There A True No Cost Loan?…Part Two

The concept was born and the seeds were planted. All that was needed was a more receptive and accommodating lender or something………

…and in1991, that something came along.

As mortgage brokers, we seek out the most competitive wholesale lenders in the marketplace. While there are literally hundreds of mortgage lenders, we have found over the years that dealing with a smaller group of the more aggressive wholesale lenders allowed us to leverage our size and gain even better rates for our clients. In 1991, we were working with one such lender, Independence One. (Independence One was later purchased by Norwest Mortgage, who in turn was purchased by Wells Fargo Home Mortgage.)

While I must confess that I cannot recall the exact date or even the specific interest rates that were then available, I’ll provide you with an example that will illustrate essentially what I saw in Independence One’s Wholesale Rate Sheet between one day and the next.

INDEPENDENCE ONE
Wholesale Rate Sheets

The bracketed figures above represent what a wholesale mortgage lender would pay to the mortgage broker and the unbracketed numbers represent what the mortgage broker would have to pay to the wholesale mortgage lender to obtain the corresponding rate. In other words, let’s assume a $200,000 mortgage and see what the one day rate sheet looks like in dollars:

(For a more detailed explanation of this pricing concept, click
“What is the rate today?” or simply give us a call, keeping in mind that
“Education and understanding make for better decision making.”)

For our purpose, let’s make two additional assumptions:

• The mortgage broker will expect to make a 1% fee equal to $2,000
• The so called “garbage fees” appraisal, credit, title, escrow etc., etc. are equal to $3,000.

Now let’s see how each of these interest rates converts to total costs to the borrower:

(Reflecting on “Is There A Truly No Cost Loan, Part #1, if the above interest rates represented my options for an apartment loan in the ‘80’s, I would have chosen 9.375%, which would have cost me the garbage fees only.)

Now back to my example…

When I received the next day rate sheet from Independence One, I was quite surprised, to say the least. Initially, I thought a mistake had been made. However, when I called and questioned the additional pricing, they explained to me that “Fannie Mae”* had effectively made this pricing available to assist first time buyers with the high closing costs associated home purchases…(* Fannie Mae was created by Congress to increase the availability and affordability of homeownership to all classes of Americans. Click CONFORMING LOANS to learn more about both Fannie Mae and Freddie Mac.)

Happy that a mistake had not been made and hearing that this was designed to benefit home purchasers, I asked if I could use this pricing structure for refinancing. The answer….”I don’t see why not”!

Thank you, Congress.	Thank you, Fannie.

So here is what the next day rate sheet looks like in dollars:

And now, we’ll see how each of these interest rates converts to total costs to the borrower:

As you can see, by accepting an interest rate of 9.750%, your total cost for this loan is… zero! So now you know the rest of the story.

Now that you have a better understanding of this concept and you’re interested in learning some of the benefits of this type of loan, click Part Three.

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