The “what”, “why” and “who” in the cost of a home mortgage

I can buy a Coca-cola beverage in three different places and will be very different in all aspects even though it’s the same product. I can pay as low as $.20 for a can of coke if I go to Costco. However, I will have to drive there, show my membership card, get additional 31 cans of them which I don’t need right away, wait in line, drive back, put them in the refrigerator, and then drink. I can also buy the same coke and pay $1.25 at a convenience store. They will be nice and cold, don’t need a membership, and probably don’t need to stay in the line too long, but again, I will have to drive and pay more than 5 times compared to the Costco, but good thing is that I don’t have to buy 32 of them just to drink one. Lastly, I can go to a restaurant, sit down at a nice table, drink endless coke on a nice cup with ice and pay $3.99. Again, they are all same coke.

Similar to many different products and services, we all know that we get what we pay for. Consequently, in Home Lending, there are different types of entities that provide mortgages such as brokers, direct lenders, and banks. However, just like the example above, a 30-years fixed mortgage product, like coke, is a 30-years fixed mortgage no matter where you get it from.

In a nutshell, brokers are individuals or smaller companies, that provide home loan services by shopping the best lenders for you.

Direct Lenders are bigger companies that have a direct relationship with the wholesale and provide the same home loan to the customers. However, they only do a mortgage. Banks are Financial service centers that do not only provide mortgage services like Direct lenders but also have other products such as checking accounts, investments, business loans, and many other banking services. In many cases, banks lend their own money to fund the loan.

Regardless of who you go to get your mortgage, the cost of doing a home mortgage can be divided into 3 main parts. They are the Lender fee, 3rd party fees, and Pre-Paid (not an actual cost).

Lender Fee: This is the fee that the company will charge for the services they provide. Different companies use different names such as Origination Fee, Application Fee, Underwriting and Processing Fee, etc.

They can usually range from $500-$2500. In addition to the Lender fee, you, as a customer have options to “buy down” the interest rate by paying an additional fee called “points”. For example, you can either get a 3.0% with 0 points or 2.75% with 1 point. Each 1 point represents 1% of the loan amount. Therefore, before you make a decision just based on the rate, take a look at this additional fee called “points”.

Some lenders will automatically have this fee with the respected interest rate.

3rd Party Fee: These are the fees that one must pay for other services such as appraisal, title insurance, escrow fee, document preparation fee, credit report fee, recording fee, etc. These fees will be selected and presented by the lender but a borrower may also have options to shop for some of them such as Title and Escrow companies. The rest of the 3rd party fees will be set. For the most part, however, regardless of which lender you chose, these fees will be very similar to competitors.

Pre-Paid: These are not actual costs. These are pre-paid interest which are for days to cover any time gap from the time you sign your contract to the day your first payment incurs. Also, there is something called escrow deposits. These are the deposits you have to make for property taxes and insurance if you decided to pay together with your mortgage.

Too much information to swallow? Yes, it is. However, as I mentioned before, just like the coke example, there will be convenience, service, and time factors that will be a compensating factor depending on which lender you want to choose. Also, just like you won’t pay $6/gallon on gas compared to $4/gallon across the street, most of the lenders will be very competitive with each other. One main factor that I did not mention is that you want to go with a Lender or someone that you can trust and feel secure with your finances.