Rowyn (rowyn) wrote,

The House Safari continues

Monday, I spoke with the mortgage department at Toddler Bank again. Even though I've worked in the loan department for 6 years, I don't have all that much experience with typical mortgage packages.

See, the sort of mortgage that almost everyone gets on their primary residence is not, in fact, financed by a bank. They're often brokered by a bank. But for the most part one of two government-created (but privately owned and run) organizations -- Fannie Mae or Freddie Mac -- will wind up selling the loan on the secondary market. What I mean by "secondary market" is "bonds on a publically traded exchange". If you own a mutual fund with bonds in it, odds are very good that you own interest in the US mortgage market. It's a really popular investment, in part because these bonds are viewed (perhaps unfairly) as very low-risk.

Because the Fannie Mae/Freddie Mac's (there's a difference but I don't remember what it is) deals are viewed as uber-secure, they can offer better rates than any bank can. But FM's charter doesn't allow them to broker mortages directly. So banks make money by doing the loan docs, charging an upfront-fee, financing the deal for a couple of weeks, then selling it to one of the FMs.

For the first couple of years I worked for Baby Bank, we didn't have a program in place to sell to FM. When we did set one up, it was pretty much a seperate department, with its own processor and loan oficer. Still is. So I don't see a whole lot of these.

There are a lot of types of mortgages out there. The most common seem to be 30-year fixed interest rate, and 5-year adjustable-rate-mortages (or ARMs). ARMs are usually amortized over 30 years, just like a 30 year fixed loan. "Amortized over 30 years" means "if you make the regular payment promptly each month, in 30 years the loan will be paid in full."

The big difference is that on a fixed-rate loan, your interest rate stays the same until the loans paid off. On a 5-year ARM, it stays the same for 5 years and then changes periodically -- usually annually -- thereafter, based on whatever the market rate is at the time of the change. Your payments change with the interest rate.

Even though it's possible for the interest rate to drop when it changes, ARMs favor the lender. After all, if rates drop, you can refinance a fixed loan to take advantage of the drop. But if rates go up, the lender can't get out of the deal.

Mortages are priced accordingly; the best interest rates are available on ARMs, and the sooner they change, the lower the rate. A lender Reliance Mortage, I think (they got my name through LendingTree) offered me a 4.5% on a 3-year ARM.

You can also get 15-year fixed mortgages instead of 30, and these get more attractive rates than the 30-year because -- even though it's still fixed -- the lender's only stuck with it for half as long. Reliance offered me 5.25% on a 15 year fixed, and 5% on a 5 year ARM.

I decided that I wanted the 15 year fixed loan. Tempting as the 4.5% rate is, I expect interest rates to rise in the next few years, and I'm still going to have lots of mortgage left to pay off in three years. The differential between 5-year ARM and 15-year fixed wasn't large enough to merit the interest rate risk, in my opinion, and even if I invest a lot of extra money in paying down the loan, I'm still going to owe quite a bit of principal in 5 years, too.

So I took this information back to the lender at Toddler Bank. She'd offered me a 6% 5-year ARM, which, as you can gues, isn't very good compared to the deals I was offered online.

However, when I asked her about it, she went down to 5.375% on a 15-year fixed, and 5.25% if I'd pay a half-point. She apologized for not being able to match the rate I gave.

Now, the one thing that stunk about the online offers was the upfront fees. Reliance wanted $1450 in "closing costs" (and this is just their costs -- not title work, not appraisal, not inspection, or insurance, or any of that other stuff that gets paid at closing) plus a $1000 origination fee to get me the 5.25.% rate. Another lender wanted a 1% orig fee to get me 5.375%; I didn't talk to them to find out what their closing costs were like.

I did some quick calculations, and determined that 5.375% at Toddler's much lower closing costs was going to be way better than 5.25%. I couldn't even figure what my loan officer was apologizing for -- she was offering me a better deal, and I'd told her how high Reliance's closing costs were when I told her about it. Anyway, I locked in 5.375% with Toddler, so that part of this thing is settled, and I'm happy. Means I don't have to tell my agent or the seller that I switched lenders.

Still waiting for Thursday and the inspection. I should also call around with movers and find out the cost of having someone pack and move my stuff. Say, telnar, how much did it cost you for your movers?
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