OK, so hopefully you have at least a basic understanding of how mortgage loans are created. If I confused you don’t worry. The really important stuff is coming up.
Mortgage banks have two ways to work with a borrower. There is “retail” and there is “broker wholesale”.
Retail is when you walk into your bank and sit at someone’s desk and ask for a loan. The bank may call them “loan consultants” or “mortgage professionals”… whatever. This is what you are doing if you go to Wells Fargo or B of A or Chase etc. You get only the programs that particular bank has to offer.
If you use a mortgage broker then the broker takes your loan application and shops around for the best “wholesale”pricing. The mortgage broker has access with many different lenders with many different programs to choose from.
OK so what’s the difference? Well…I’m obviously biased towards brokers but I’ll try to be fair in my explanation.
RETAIL PRICING WITH A BANK When you walk into say…Chase or Wells Fargo and you meet a “loan consultant”. He or she will show you their line of products. To keep it simple let’s just stick with 30 year fixed loans for now.
So you get a rate quote and you usually have 2 choices. You can get a no point loan which means you are not paying any points but will pay a higher interest rate, or you can pay points and get a lower rate.
Remember… the lower the rate the higher the upfront cost. The bank has to sell that loan and they will not get as high a price from an investor for a lower interest rate. So they basically have to charge you the difference.
WHOLESALE PRICING WITH A BROKER If you go to a broker he or she will check their wholesale pricing. Wholesale pricing on loans is like any other commodity. It’s cheaper than retail pricing. So a broker picks an interest rate at their wholesale pricing from one of the lenders they deal with. If you want to pay points then he/she can choose a lower interest rate. If you don’t want to pay points then he/she will choose a slightly higher rate.
OK…so how does this work?
The table below will show a typical wholesale price sheet and will you how ALL loans are priced on the wholesale end.
Rate 12 day 30 day 45 day
3.500 0.250 0.500 0.625
3.625 -0.125 0.000 -0.250
3.875 -0.750 -0.500 -0.375
4.000 -1.375 -1.000 -0.875
4.125 -1.875 -1.625 -1.500
4.250 -2.250 -1.875 -1.750
Take a look at the 3.50% rate at a lock period of 30 days. The table tells us that the broker’s wholesale cost is one half (.500) of a point for that rate.
If you move down to 4.125% rate and the same lock period of 30 days you will see that the broker is now getting a “yield spread premium” of 1.625 points. That little minus sign means the lender is paying the broker for that rate.
That means the lender is going to pay the broker 1.625% of the loan amount for that rate.
You will also see that the higher the interest rate, the higher the yield spread premium.
A broker is going to usually try to make at least 1 point on a loan. Sometimes more and sometimes less depending on the size of the loan and the complexity of the loan.
If we have a $400,000 loan and use the chart above for a 3.5% rate then you would have to pay .500 points to the lender and 1.0 points to the broker (if the broker was charging 1 point). (.500 + 1.0=1.50 points) That’s $6,000 just in points for that 3.5% rate. But if you didn’t want to pay any points and the broker needs to make a point then he would just slide down to 4.0% on a 30 day lock. You see there that the lender is paying the yield spread premium of 1.0 points.
So you should see that the higher the interest rate the lower the closing costs and the lower the rate the higher the cost.(See Part 1 of this Series.) Make sense? ALL loans are priced this way.
At a retail bank such as Wells Fargo you will never see this matrix. But it will be there in the background.
Some brokers will show this and some will not. The lenders consider this confidential information so it depends on the broker. These sheets change daily and sometimes several times per day. Depending on what is happening in the financial markets.
WATCH FOR PART 3 TO LEARN ABOUT CLOSING COSTS
- Lending picks up at big banks (seattletimes.nwsource.com)