Things All Advisors Need To Know About Mortgages Part I
How Loans are Priced and How Brokers Make Money
Copyright 2006, The WPI
By: Roccy DeFrancesco, JD, CWPP™ CAPP™
Founder The Wealth Preservation Institute
(www.thewpi.org; roccy@thewpi.org)
Co-Founder: The Asset Protection Society
(www.assetprotectionsociety.org)
As many of you know, The WPI will be rolling out shortly the Master Mortgage Broker (MMB™) certification course. Since nearly every advisor and every client of an advisor not only has a current mortgage on a personal residence, but also will have multiple mortgages during their lifetime, it seems appropriate that ALL advisors should have a working knowledge when it comes to the intricacies of the confusing world of mortgages.
One of the sections of the MMB™ course that I find very interesting and think all readers of this newsletter will too is the section detailing how loans are priced and how mortgage brokers are paid in the “real world.”
To understand this newsletter you need to be familiar with a few key terms.
Loan Origination (LO) Fee—Generally speaking, a LO fee is the fee added to the closing costs of a loan by a broker who is looking to be paid on the “front-end” of the loan process. If a loan is $100,000 and there is a 1% LO fee, the broker will make $1,000 at closing (which will be an up-front closing cost the borrower/client must pay).
Discount Points (DP)—DPs are charged by the lender as an up-front cost at closing which allow the borrower/client to “buy-down” the interest rate. For example, the DP might be 1% of the entire loan balance as a closing cost to buy down a loan rate from 6% to 5.75%. A mortgage broker makes no money from DPs charged at closing.
PAR—The interest rate a lender allows a mortgage broker to offer to borrows. If a mortgage broker sells a loan at the PAR rate, he/she will make NO money on the loan unless he/she charges the client LO fees at closing.
Yield Spread Premium (YSP)—The YSP is the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale “PAR rate” that the borrower qualifies for. For example, if the PAR interest rate is 6%, the broker could offer it to a borrower at 6.125%. When a loan has a YSP, the broker is making money on the “back-end” from the lender. With this example, the mortgage broker might be making 1% on the back-end (meaning that the lender after closing will pay the broker $1,000 on a $100,000 loan).
The good thing with a YSP is that the client is not charged LO fees at closing. The bad is that the client has to pay a higher interest rate for the life of the loan.
Significant Latitude in Pricing a Loan
I had no idea a broker had so much latitude when pricing a loan. This latitude is a double edge sword and can really hurt an unknowledgeable consumer. A broker who thinks he/she can get away with a high priced loan might sell a loan to a client with a 1-2% LO fee (up-front fee) and with a 1-3% YSP (back-end fee). This would be excessive and not in the client’s best interest.
Thinks about your last loan
Did your mortgage broker explain how the loan was priced? Did you pay LO fees at closing? Do you know if the mortgage broker who priced your loan built in 1-3% YSP?
As I say over and over, knowledge is power and The WPI believes that ALL advisors should have a working knowledge when it comes to mortgages. Nearly all clients have multiple loans during a lifetime and if you can help your clients find a loan that has an interest rate which is lower by .25, .5%, etc., think how much money you’ll be able to save your clients over a lifetime. Think how much money you could save yourself over a lifetime.
Typical Loans
Most loans sold by brokers have a back-end YSP. That way a client does not have to pay LO fees at closing. There is nothing wrong with a loan that has a YSP because the broker has to make money when putting a loan together. It can come from a front-end LO or/or a back-end YSP.
Typical Questions
The typical questions once you understand how loans are priced are:
1) Is it better to buy a loan with LO fees or a YSP?
2) Is it better to buy down a lending rate at closing by paying points?
Surprisingly, the answer to these questions is not very difficult to answer. The answer depends on how long the client plans on keeping the loan. FYI, the average loan in this country stays on the books of a lender for less then five-years.
FREE Additional Information on Loan Pricing and Commissions
Due to space issues, I do not have time to give you the math which explains the answer to these questions. Therefore, I have posted to the web-site a FREE seven-page summary where I discuss in more detail the expenses of a mortgage and the fees involved. If you would like to read that summary, please click here.
1% CFA Mortgage
It still amazes me how few clients and advisors are familiar with the 1% Cash Flow Arm mortgage. I figured since I was doing a newsletter on mortgages, I should throw in a little bit on this type of mortgage. We typically use this type of loan for anyone looking to build wealth in a tax favorable manner by using the equity in their home. If you are not familiar with the 1% CFA mortgage and would like a FREE summary of how it works and can be used with the “equity harvesting” concept, please e-mail info@thewpi.org for the summary.
Should You be Selling Mortgages?
If you are a financial planner, insurance agents, etc., the answer is absolutely yes. Once you learn the basics and affiliate with a national broker, you will do a better job for your clients than your local “mortgage brokers.” If you are a CPA/EA/accountant, I suggest you strongly consider mortgage sales as a 2nd source of revenue. Your clients would much rather buy mortgages from someone they trust. If you are an attorney and are in a state where you can form companies which market to your client base, selling mortgage is a vanilla topic to deal with where the income can be significant. If you would like to contact The WPI approved mortgage broker who specializes in working with professionals (vs. established mortgage brokers), please e-mail info@thewpi.org for more information.
Roccy DeFrancesco, JD, CWPP™, CAPP™
Founder
The Wealth Preservation Institute
378 River Run Dr.
St. Joseph, MI 49085
269-216-9978
269-983-6917 (fax)
www.thewpi.org
Are you a CWPP™ or CAPP™? To learn more about the CWPP™ and CAPP™ certification courses and how to take your consulting to the "next level" go to www.thewpi.org.
Author of The Doctor's Wealth Preservation Guide which can be purchased for $49.95 from The WPI at blocked::mailto:info@thewpi.org.
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Copyright 2006, The Wealth Preservation Institute
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