Ignorance should be less expensive in 2011

A study of FHA mortgage closing costs turned up some interesting data that probably prompted some of the reforms we will see in the coming months.  Here is a quick rundown of what you will and will not have to worry about when shopping for an FHA mortgage next year.

Not to worry: How you pay your closing costs

In the past, HOW you paid for your closing costs influenced how much you paid.  A review of HUD data indicated that when borrowers got their closing costs paid by their sellers or through brokers’ yield spread premiums, they received less benefit than expected. For example, you’d expect that a seller contribution of $1,000 would reduce what you pay for your financing by $1,000. But what really happened was that costs to borrowers were only reduced by about $500 for every $1,000 spent by sellers. Borrowers whose fees were offset by yield spread premiums (commissions paid to brokers by wholesale lenders) only got about $200 in savings for every $1,000 in YSP paid to their brokers. And what about those who chose to pay discount points to get lower mortgage rates? They only received about $200 in benefits for every $1,000 in points paid.

The take-away: Today, lenders must earn the same amount for your mortgage no matter how it is paid for.

You still have a choice of paying discount points for a lower mortgage rate, or paying a higher rate  in exchange for the lender absorbing your mortgage costs. And you will pay more interest over the life of your loan if you finance your FHA mortgage insurance premium and / or refinance costs than if you pay them in cash. But you will get pretty much the same deal from your lender no matter how you pay your loan fees.

Not to worry: In the past, borrowers who knew less about mortgages paid more for them.

According to HUD: “Lenders and brokers are professionals and always know what competitive loan terms are. It appears that they also have views regarding what their customers know. Lenders make lower-priced offers to borrowers in high-education neighborhoods, evidently expecting them to be familiar with competitive market terms…Price discrimination of this type does not arise in competitive markets where shoppers are well informed.”

Mortgage reform laws preclude loan officers and mortgage brokers from earning more on a loan to an educated borrower than they do on a loan to a less-educated one. So the price of ignorance will be lower in 2011.

The take-away: you still need to shop

The law does not prevent a one lender from charging more than another lender. And lenders that choose to focus their marketing efforts to less affluent or educated parts of the country may still get away with charging more for loans. You can prevent overpaying by simply comparing the offerings of several different FHA lenders when you shop for an FHA new home loan or refinance.

The no-cost loan really does cost less

An interesting item in the HUD study was that borrowers who opted for no-cost loans realized more benefit than would be expected — they did pay a higher interest rate to compensate for having no loan costs, but the increased rate did not offset the cost savings most of the time.  Per HUD: Borrowers with “no-cost” loans effectively pay $1,200 less for loan origination services than borrowers who pay some lender/broker fees in cash.

The lower price suggests that the complexity introduced by loan terms that involve a combination of cash and interest rate, with variations in yield-spread premiums, points, and even seller contributions makes it more difficult for consumers to figure out their total costs and contributes to higher prices and higher fees for lenders and brokers.

This entry was posted on Monday, December 27th, 2010 at 5:33 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.