When the truth comes out

So I got a phone call today from one of my clients. She recently sold her house here in Austin and moved to Houston to be closer to family. She really liked the way she was taken care of in the sale of her home here, and she emailed last week to see if I could help her find both an agent and a mortgage broker to assist her in Houston.

As I do with all my clients, I referred her to Amy Krause, my strategic alliance partner and my own personal financial consultant. During their first phone conversation though, my client was concerned about the "brokerage fee" that Amy discussed with her. My client said she had never had to pay an upfront fee to get a mortgage before.

You know, when we do this type of work every day, we use words that we think everyone knows and understands, however when an instance like this comes up, it serves as a reminder that people don't always understand what we are talking about.

When mortgage brokers work on our behalf, they get paid in the form of a "brokerage fee"...this is what the bank pays the broker for hooking someone up with a mortgage. A 1% origination fee is pretty standard. So in the case of a $150,000 mortgage, the origination fee would be $1500.

Now that seems like a lot of money when you're thinking this will come out of your pocket. Thankfully though, the brokerage fee is something that happens at closing through the HUD and doesn't usually come directly out of your pocket.

My client wanted to know why she would have to pay this fee, when there are "deals" out there that preach ZERO ORIGINATION, ZERO FEES. This is important so I thought it would be great to explain here.

When you go with a zero fee loan, your interest rate will ALWAYS be higher than what you can get if you're paying a 1% origination fee. Remember the mortgage broker has to get paid someplace.... when they're charging an origination fee, you know up front what they charge is. When you do a zero fee loan, you know that the bank is going to pay the broker some amount for selling this loan. Unfortunately you rarely find out what the amount is.

So let's look at this. The loan set up with a 1% origination fee looks like this: $150,000 financed, 6% interest, 30 years. The total payments on this loan, assuming that you'd be paying the entire loan off, would be $323,757.28. Remember this loan "costs" you $1500 for the origination fee.

In the "no fee" setup, the mortgage company will give you a slightly higher interest rate. Let's say it's just 1/4% higher. Not much higher, right? Look at it over 30 years.... $150,000 financed, 6.25% interest, 30 years. The total payments on this loan, assuming that you'd be paying the entire loan off, would be $332,487.29. Now this loan doesn't "cost" you anything.... but when you look at the increased interest over the term, it is actually $8730.01 more than the first setup.

Would most people know this? Probably not. Would most mortgage brokers explain how they make money if they don't charge an origination fee? Probably not.

The bottom line is this....it's very important to make sure you are working with qualified Real Estate and Mortgage Consultants! If you think something is odd or just doesn't make sense to you, it's important to know that someone will give you a real, honest answer.

The next time you find yourself wondering....be sure to give us a call!