Ah, Costs. One of the most misunderstood questions and answer segments on every loan. This page is divided into two sections: “Gimmie the basics” and “Nerd out”. Please choose whichever pleases you, though some of the information repeats – The key is to make yourself comfortable. While what you pay is relatively fixed, how you pay has far reaching implications. Indeed, this is where our expertise and knowledge of the financing transaction sets Longstreet Financial apart – See the “Our Philosophy and Program” page for more on this.
“Gimmie the basics”
Our Charge
We (Generally) Charge 2.5 Points. A point is 1% of the loan amount. There used to be haggling, and market based pricing. As a broker we would have a goal for fees and negotiate from there. Some were higher, some were lower. The government made that illegal (Dodd-Frank). Now, we charge the same to everyone and can only vary by amount of credit extended (Loan Amount). Percentage is the only way to go, as otherwise we would be violating Regulation B – charging more (percentage) to those with smaller loans. So it’s easy like that.
Other Charges
The lender will charge for title insurance, the title company will charge for conducting the closing, the appraiser will charge for completing an appraisal, someone will charge an underwriting fee. Sometimes the government will charge a tax – there are a few other minor charges (tax service, credit report). In each case they are all disclosed on the LE (Loan Estimate – delivered to you within 3 days of an application)
So now that we have defined the fees, here are the basics:
It does not matter what program you pick, the fees all get paid. Who actually pays them, and how they are paid, are the only real variables.
It is always less expensive to pay now than pay later.
When comparing programs, just look at the APR (Annual Percentage Rate) on the LE (Loan estimate), a required 3 day disclosure) the one with the lower APR is less expensive. Pick the one that meets your cash for closing needs and makes you happy.
“Nerd Out”
We (Generally) Charge 2.5 Points. A point is 1% of the loan amount. There used to be haggling, and market based pricing. As a broker we would have a goal for fees and negotiate from there. Some were higher, some were lower. The government made that illegal. http://files.consumerfinance.gov/f/201311_cfpb_updated-sticker_lo-comp-implementation-guide.pdf Now, we charge the same to everyone and can only vary by amount of credit extended (Loan Amount). Percentage is the only way to go, as otherwise we would be violating Regulation B – charging more (percentage) to those with smaller loans.
Other Charges
The lender will charge for title insurance, the title company will charge for conducting the closing, the appraiser will charge for completing an appraisal, someone will charge an underwriting fee. Sometimes the government will charge a tax – there are a few other minor charges (tax service, credit report). In each case they are all disclosed on the GFE (Good Faith Estimate – delivered to you within 3 days of an application) The GFE is a required disclosure of RESPA, (Regulation X) and here is a copy of the form (GFE) and here is Understanding the GFE page 5-16
Now comes the math, while it remains true that (as above) that it is less expensive to pay now vs paying later (TANSTAAFL – Hat-Tip to Milton Friedman, Nobel Economist and Professor at the University of Chicago, where the Founder of Longstreet received his MBA) and you need to compare the APR on the TIL (Also from Regulation Z), the following will be illustrative:
Now, let’s compare three hypothetical options on a scenario:
$300,000 Refinance on a 30 year mortgage with 2.5% in broker fees and 1% in total other costs. At 3.5% in costs the costs are $300,000 * .035 = $10,500. Current rate is 5.5% and the loan has 26 years left (Payment of $1,809.43 P&I)
Scenario #1. A “No Cost” or “Fee Free” loan (TANSTAAFL) rate of 4.5% new Payment of $1,520.06, for a savings of $289.37/mo. That’s for 26 years (312 mo.) but then it adds 4 years onto the mortgage @$1,520/mo.) so then (312*$289.37)-($1,520.06*48) =$17,320.56 savings (while I’m willing to model the actual savings, I am ignoring the discounting of the time value of money – we can do that, but that’s just unnecessarily complicating the matter, fact is the payment went down by $289.37 mo. (or 15.99%!) Damn that’s nice.
Scenario #2. Have the house pay for it – “roll in” The cost gives a new loan amount of $310,500 but a lower interest rate of 4.0%. For a payment of $1,482.37. This payment is less than option #1! $37.69 per month to be exact, which brings the total monthly payment savings to $327.06 (18.08% of original payment!) and a new total savings of (312*$327.06)-($1,482.37*48) =$30,888.96.
This is where it gets nerdy….
You have flattened out the curve!
From this: 
To This: 
Now it’s hard to see, but the difference is the $13,568.40 additional savings. You can logic this out easy by comparing the loan we have $310,500 over 30 years at 4% with a payment of $1,482.37 (360 months x $1,482.37 = $533,653.20) vs a loan without any interest. If you could borrow the $310,500 at 0%, the graph would not have a bulge on it – it would be a straight line. You would get to save the difference – the interest you did not pay. You would pay back $310,500 – so you would save $223,153.20 ($533,653.20-$310,500)
You borrowed more money but paid back less! Amazing! It does not matter how much you borrow, but how much you pay back. If I could give you a $1,000,000 loan for $1/mo. and it would be $0 Balance in 30 years, it’s a much better deal – you would only pay back $360. One caveat to remember, you did borrow more, so there is a payback period – if you sell the home within 4 years or so, you’ll owe more that you would have under option #1 – you can see that in the graph as you start higher ($310,500 vs. $300,000) even though the slope is steeper, it still takes a little bit of time for them to cross – and you can model this out under the “Refinance Break Even Point Calculator" in the mortgage calculator section on the website)
Option #3. Bring the check for the costs in. This leaves your checkbook a little lighter, but the payment is lower at $1,432.25 ($300,000 @ 4.0%) This saves you an additional $50.12/mo., which brings your total savings to $48,932.16. Which is almost triple the savings of option #1 with additional savings of $31,611.60 (you can check my math)
Now, this was a refinance scenario, but it works on purchases too – You just need to know how to structure the purchase agreement. (Which we do)