What’s Up With Mortgage Fees & Points?

Consumers have gotten used to refinancing their mortgage with little to no costs over the past 10 years.   This is about to change!  The problem was simple; business only works when it’s a win-win situation for everyone included.  This has not been the case in the mortgage industry.   The consumer refinances to a lower rate (good for consumer), the mortgage broker makes a commission on the deal (good for the broker),  the end mortgage company or bank puts the loan on its books and anticipates a steady stream of payments from the consumer (good for the mortgage company/bank).   The problem is that when that loan is paid off in the first year it caused a “loss” situation for the end mortgage company.  They anticipated a steady stream of payments and paid an upfront fee to the broker for this.   When it was paid off through another refinance after 3 or 4 payments, they were the big losers!

Example:   The Smith’s refinance their $200,000 loan in 2006 and receive 6.25% without any closing costs… when their broker/lender calls them back in three months to tell them rates have fallen and they can get 5.875% and pay nothing in closing costs… they jump at it!   Did they do the right thing?   Unfortunately, the answer is “maybe”.   They could have received a rate of 5.625% by simply paying the normal closing costs, but it is an easier sell to tell someone it will be “free”.  At .25%, it would have taken the Smith’s approximately 2 years to make up the $1,000 in closing costs with the lower rate and monthly payment.   If they had this mortgage for more than 2 years… they would have been better off with the lower rate and upfront fees.   Who had a mortgage for more than 2 years??? Not many, but it was because we were in a very unusual period of dropping rates and mortgage brokers/lenders didn’t always get the lowest rates for consumers (used to pay for some or all of the closing costs).

Recently, the mortgage companies have changed their pricing to make these mortgages “stick” a bit longer.   Bankers refer to this as having “skin” in the game.   Today… 30 year fixed rates can be as low as 4.875%, with normal closing costs AND a POINT (which is 1 percent of the loan amount).   In this case, the Smith’s would pay the $1,000 approx in closing and $2,000 for the lower rate.   That’s $3,000… why would you do this?   Well, if rates are near the bottom you will make up the $3,000 quickly… from 5.75% to 4.875% would show savings of approximately $1,600 – $1,750 per year!  Once again, in two years, the consumer wins!   The longer the consumer pays their mortgage, the end mortgage company wins.