Understanding Lender Fees Helps Buyers Negotiate Lowest Cost Financing

“We have had a bit of a slowdown in loan originations,” the Anchorage mortgage loan officer said the other day. “Send us some business and the buyers may be pleased with what they hear.”

An interesting thought, coming from the crowd that consumers think are hard-nosed. Goodness, getting a mortgage loan is like getting undressed in public for all they seem to make you go through sometimes. The running gag is that after you have lived in your house for a year the loan officer calls up asking you to bring “one more” piece of paper for your loan file.

So a few recent buyers who were shopping around for mortgage loans called this lender. They were surprised. One-half price for loan originations. No document preparation fees. What’s this? A sale on mortgage loans?

Why not? Money is a commodity like anything else you buy. It has a price. The price has to do with supply and demand. Demand weakens and the price comes down. To be an informed consumer, however, means knowing a little more about the outfits that offer loans, what their charges are, and where they might be willing to negotiate with you.

Most consumers don’t investigate anything but interest rates. Interest rates get a lot of play in the popular press. The Federal Reserve Board fine tunes the money supply with the discount rate, what it charges member banks for overnight loans. The cost of funds works its way into the consumer economy with short term loans for consumables like appliances and automobiles, and long term financing for real estate.

Mortgage money reaches the market as long bonds backed by pools of mortgages. Your stock broker can get you into mortgage-backed securities just like a stock. You would own a piece of a pool of mortgage loans that the underwriter of the bond has purchased from originating lenders, like your bank or mortgage company. The people you deal with for your home loan generally aren’t really the source of the money. They are just earning fees to create the loan, fees for collecting the payments and maintaining escrows for taxes and insurance, and, when necessary, handling the foreclosure process.

So interest rates have everything to do with the price of money in the long bond market and very little to do with the discretion of the loan originators you deal with in Anchorage. You may be able to discern differences in interest rates from one lender to another because the different lenders sell to different investor pools. If you care much about the cost of financing, however, you need to get beyond interest rates to what Paul Harvey would call “the rest of the story.”

That part of the story involves all the fees the originator charges, including the points on the loan with which they fine tune the loan’s interest rate, known as yield. The individual across the table from you in Anchorage and his or her managers have some latitude with these not insubstantial charges. If you ask about them you will come across as an informed consumer. If you never ask you will receive the required good faith estimate containing the standard charges for that organization.

The so-called bank fee is usually one percent of the loan. If you are related to somebody at that institution you might get a break. If the lender is looking for business they may have a sale going on. For some lenders one percent isn’t enough. They add document preparation fees, underwriting fees and the lot: these just have the effect of increasing the bank fee without saying so. Any of these fees may be negotiable.

Another fee is for the lender’s appraiser. Some lenders have different standards for appraisals and therefore different costs. If it is important to you to have an independent evaluation of the value of the property, somebody is going to have to pay for it. If you and the lender don’t care, however, you can save $500 or more. In the Anchorage market, appraisals normally come from seller proceeds. If you know in advance your lender has a reduced fee for appraisals—or your employer is going to pay for it—then offer less for the property because you are reducing the seller’s costs.

Discount points may be negotiable. The originating lender’s cost of funds changes from day to day based on quotes from its investors. They get a quote for the rate of the day, fine tuned by interest you pay up front, expressed as a percentage of the loan. The lender would say that today’s rate is “8.5 percent with one point.” That means for a $150,000 loan your payment would be calculated at 8.5 percent interest but you would pay $1500 extra interest at closing.

That one discount point, however, may not be the actual points quoted that day by the lender’s investor. The investor’s quote might have been 0.875%. The same lender who tells you they have little or no extra fees and a discount on a bank fee might be making up the difference by tacking on an extra 0.125% on the points, $187.50 in the case of that $150,000 loan.

You will never figure all this out except by making complete comparisons on the same day of all the costs of different lenders and then seeing which of them is negotiable on which items. That’s more than most consumers are willing to do, of course, so it’s no surprise that their choices are usually made on the image of the institution, the salesmanship and service of its personnel, and the recommendations of other borrowers and real estate agents.