If you want to know what a mortgage really costs and where the money is going, you'll need to review the actual rate sheet. Wholesale lenders produce rate sheets that show the details of the way the rates for their mortgage programs work. Mortgage brokers use that information to price your loan and, in many cases, price in additional profit for themselves. Asking your lender for a copy of the rate sheet for the program he's quoting will get you on an even playing field with him.
Rates and YSPs
Most rate sheets contain a listing of note rates and a table of columns to their right. The columns show whether the broker will have to pay in money for the loan, or will receive money for making the loan. For instance, a rate sheet may have a note rate of 4.875 percent, a 15-day adjustment of (0.785) and a 30-day adjustment of 0.135. What this means is that if the broker makes a mortgage at an interest rate of 4.875 percent, the lender will pay him 0.785 percent of the loan's balance if it goes forward with a 15-day lock, or he will have to pay the lender 0.135 percent of the loan's balance if he needs a 30-day lock. Typically, the amount that the broker can pocket goes up as the loan's interest rate goes up. This hidden profit is called a yield spread premium.
Loan pricing is typically dependent on the lock period. Lenders have to go to the market to find money on a regular basis, so what it costs them to make a loan to you keeps fluctuating. However, you'd probably like to know that the rate at which you applied will still be available when you close on the loan. You do this by locking the rate. Rate locks cost the bank money, since they're taking the risk that the interest rate will move up while they're waiting to close on your loan. As such, the longer your lock period, the higher your rate will be or, on the other hand, the lower the premium for your broker will be.
The rates on the top of a rate sheet are generic. Below the main rate section, rate sheets have a list of adjustments, which are changes to the rate that depend on the particular loan. Generally, adjustments make your loan rate go up. Your loan rate can be adjusted up if it has a high loan-to-value ratio, if you have a less-than-perfect credit score, if you buy a condo, or for any number of other reasons. For example, if you have a 710 credit score, that may be a 0.500 point adjustment, while waiving the requirement for an escrow account could cost you another 0.250 points. Those two adjustments would make a 4.75 percent rate go up to 5.5 percent.
No Closing Cost Loans
The yield spread premium described above can be hidden profit for a broker. If he can charge you a higher rate, he can pocket more money. However, he can also use his yield spread premium to pay your closing costs for you and structure a "no closing cost" loan. With this in mind, a yield spread premium isn't always a sign that your broker is putting extra money in his pocket -- it could be a sign that he's keeping money in your pocket, instead.
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