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<jhurlbut@gmail.com> wrote in message
news:1159403056.222817.109930@m73g2000cwd.googlegroups.com...
> Jeff and Allen,
> Thanks so much for the replys. That does make sense. The one thing I
> do not really understand is that as far as I can tell, when a buyer of
> mine asks to have the prepay removed from the loan, the rest of the
> terms of the loan don't change. So in Jeff's example, it would seem
> that to remove the prepay, the interest rate, or some other fee would
> rise? I just haven't seen that happen, at least with the broker I do
> 90% of my business with.
Then he's shopping the loan to another lender or the rates have improved or
both.
You are correct though. If the prepay is removed, then another quality of
the loan package ought to go up as a result -- either a fee or the interest
rate. One thing that you may not be aware of is if the borrower is right on
the line for income and debt ratio, and it perhaps above where the loan
officer thinks the loan will get approved at. He can take a package to Bank
A and get an approval with a prepay, when the buyer balks, he can submit the
package to Bank B and get an approval with no prepay. Personally, I always
submit to the bank that has no prepay, then submit to the bank that has a
prepay if the first bank gives a denial.
Of course, the loan officer can get a rebate if he gets the buyers to take
the prepay -- the bank pays him more for the same loan if they have an
assurance that the loan will remain for a given period of time. the rebate
could be a quarter or a half point <whatever> and he could simply chalk it
up to experience and forgo the additional rebate and cancel the prepay for
the buyer.
You have to know how to read a rate sheet to find this, but let me give an
illustration. Say the borrower is a good one -- good income, low debt, high
FICO, etc. The loan officer can get the people a 6.250 30-yr fixed, and it
flies throught the automated system he submits the loan on. (The automated
system is geared according th Fannie Mae, and looks at all kinds of stuff
then issues an approval. Or not.) So, the buyers is good, and the automated
system likes the loan. The loan officer makes .500 in fee from the bank for
selling the loan package, then he makes another .250 in fee for tacking on
the prepay, then he charges the buyer a point (1.000 in fee) to arrange the
loan in the first place. So, he charges the buyer a point, and makes .750
(3-quarters point) in rebate from the bank for sending the loan package in.
The buyer objects to the prepay, and you ask them to remove it. The loan
officer says, "what the hell, I will take a point and a half instead of a
point and three quarters." He comes off as the Good Guy because he
"negotiates" a better loan for his (and your) client, but really he is
simply taking a hit to his fee that he ought not be charging anyway.
Now, if the rates have improved and he shops the loan to another lender, he
might be able to get the .250 back in rebate and still give the same
interest rate. In this instance, he isn't taking a hit, he just is doing a
bit of homework.
Back to the rate sheets. When I look at a sheet, I've a matrix of rates
and fees that vary according to the lock duration. I can give the buyer
6.750 and get so much rebate that I can pay the closing costs for the buyer.
Or, I can give the same buyer on the same day 6.250 and get a small rebate
and the buyer pays closing costs, or I can give 5.750 and get no rebate; in
this case the buyer pays more points plus all closing costs. One has to do
the math -- easily accomplished with a Mortgage Calculator -- to see if the
buyer is best served with the loan that has high front end costs or no front
end costs. Basically, if one planned on living in the home for 30 years and
never refinancing, then the high front end costs would be better because the
payment would be lower and the total interest would be much lower over the
life of the loan. But, if the buyer knew he was going to sell again in a few
years or refinance, then the low front end cost loan could work out better
because he could conceivably earn more on the money he would put to the
front end costs if he left that money in his investment portfolio. As a loan
officer, I generally tended to put my borrowers in the middle -- they paid
closing costs and I took the small rebate for my commission.
PS
I pulled the rates out of my ass to illustrate the theory, I've no clue as
to whether I could actually offer a loan today at these rates.
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Re: When are prepayment penalties added to loan contracts?
