How Lenders Trick You

A few months back, we did a video that was called ‘How Lenders Charge You,’ and I guess the whole team asked if we make it a little bit spicier and turn it around and really call it ‘How Lenders Trick You.’ Because now, after the last couple of months, we’ve been going through and working with some folks, it’s brought up multiple, multiple times exactly how lenders charge buyers.

So, the title might sound a little bit spicier and I might go a little bit longer, but the whole goal of this is to reiterate some of the things that we had back on that past video and how lenders ultimately charge borrowers and some of the things that I see where it sometimes could be tricking folks to make sure things look better than what they really will be in the end when they go to close on a loan.

So, let’s recap those three different ways that lenders charge you.

There’s the interest rate, there’s lender closing cost, and there’s finance points.

Those are three different ways you get charged:

Interest rate, that’s what most folks think of – “higher rate, the lender must be making more”, “lower rate, they must be making less”.

But on top of that, there’s lender closing costs.

That’s not necessarily title taxes, those charges, those are generally going to be the same no matter what lender you’re with, but things like origination, underwriting, processing, the fees the lender charges to do and complete a loan.

And lastly, there’s finance points – that’s effectively you paying money upfront to get a lower interest rate.

Now, think of it like a three-way teeter-totter, that’s what I like to call it.

If you end up raising one, you might lower another.

If you lower one, you probably raise one of the other two.

For example, you might hear some lenders say, ‘We have no fees, no origination, no underwriting, no lender fees.’ – how do you get paid?

Well, somewhere else, it’s either in the interest rate or paying some finance points.

If a rate sounds way too good to be true, the reality is you might end up with some points and some closing costs on there, offsetting that lower rate.

And that’s where I always say, ‘Hey, the danger of chasing rates can be that you end up paying more upfront in costs, and then you pay so much upfront for a lower rate that might save you 100 bucks a month, but it costs you $10,000 to get that $100 a month savings. It’s a hundred years to get that payback period. It doesn’t make sense.’

The problem is sometimes buyers, as consumers, we’re chasing too much either the lowest rate or having no costs, and then we end up losing out.

And that’s where when going into the ways we call it lenders tricking you, or I should say really the things you gotta look out for – because for lenders’ sake, it’s such a game when folks are always looking around for the best rate or lowest closing cost.

Lenders will always give you what you want to hear, and it can be dangerous on trying to evaluate the different quotes or loan estimates that you’re getting.

So, the thing is when you’re looking at those three, you want to make sure that if you’re going to be comparing lenders, you ask each one for the same type of quote or loan estimate, meaning that if you’re saying, ‘Hey, what’s most important to me – rate?’

Okay, maybe I’m going to ask everyone, ‘Please give me your best rate,’ and you know you might be paying something for finance points or lender fees.

‘Please break out your lender costs, charging only one point, and what’s your best rate you can give me?’ – usually, you’re going to get a little bit better interest rate if you’re paying some points, that finance charge upfront.

Or, I would recommend the best way to try to compare is saying, ‘Hey, please give me your interest rate with no points and tell me what your lender fees are.’

Because as long as the lender fees are zero or they’re negligible, you’re somewhere in at $500 to $2,000 range, depending on loan size, with a small loan balance, it could actually be a whole lot, but if the lender fees are relatively negligible and there’s no points, it gives you a good idea of what the interest rate is.

But if you really want to get the most pure comparison and know really what the rate is, ‘Hey, please give me your best interest rate, and if you can, please roll the lender fees into the rate and as well, no financing points.’

That’ll give you a good idea of, ‘Hey, where things really stand from an interest rate perspective.’

However, that scenario might not still be the best option for you to choose because sometimes those lender fees, underwriting processing, those kinds of things do help make it to where that interest rate is much more manageable.

But when you start paying way too much in points or lender fees, usually the return on that lower rate isn’t worth it when you divide those monthly savings back into the price that you paid upfront.

S,o the ways that it’s not necessarily tricking you, but we’re going off of what you tell us, if we start here and you’re all about rate and you’re telling me it’s all about rate, some lenders will tell you, ‘Great, I’ll give you the lowest rate.’

There’s going to be points and fees next to it.

So, it’s up to you to know, ‘Hey, how do I evaluate those correctly?’

Because sometimes folks, as lenders, will end up quoting you that super low rate but not necessarily tell you the points or tell you what the closing costs are until you request a good estimate on it.

So, it’s important to ask for that upfront.

The other thing that’s a little bit unique right, we talked out three different things: the interest rate, lender closing costs, and the finance points and that’s three-way teeter-totter, that’s the big thing, that’s what lenders have control over – but another way that sometimes folks are getting tricked, and we just had this today and a couple times last week, is all of a sudden someone’s asking us, ‘Hey, Evan, this cash close is a lot lower with another lender. Please, can you tell me why? I think we want to go with them.’

And I’m like, ‘Whoa, whoa, whoa. The rate is about the same, but the fees were significantly less for our side.’ And I’m like, ‘Why would you do that?’ ‘Oh, because they left out taxes and insurance.’

So, the quote that they had did not have taxes or insurance, which when you have taxes and insurance, not only does that affect your monthly payment when you’re looking at loan estimates, it also affects that cash to close when you’re going to close on the home.

Why?

Because upfront, you have what’s called prepaids and escrows.

Prepaids are where you’re prepaying taxes and insurance to make sure they’re settled at closing.

And escrow means, ‘Hey, we’re putting some of those up front as a cushion just in case you miss some payments.’

Now, you can waive your escrows, meaning the escrow part could go away, but prepaids are usually always going to be there.

So, here’s the deal. Let’s say that property has the insurance for $3,000 a year and the taxes are $2,000 a year, something like that, right. Which I know if you’re watching, depending on the area, that could be way off or really low.

So, let’s say it’s $3,000 in insurance, $2,000 in taxes.

If you don’t have that on your quote sheet, remember upfront, insurance, you’re typically having to pay for a year of insurance upfront or at least give us proof that you’ve paid it if it’s not going to be on the final sheet.

So, right there, $3,000 insurance, $3,000 of cash to close is off the chart.

That makes another quote look really good when they don’t have that insurance in there.

Taxes, there’s going to be usually somewhere between 3 and 10 months of taxes due.

So, all of a sudden, with that $2,000 in taxes, you’re probably missing $1,500 to $2,000 on that estimate.

So, right there, just leaving out taxes and insurance will make your monthly payment look better.

And here’s what I see sometimes – folks go, ‘Oh, yeah, I knew that the monthly payment would be lower’ – but did the other folks tell you the cash to close is a lot lower too?

Because if prepaids and escrows are out, probably not, that doesn’t happen.

In that scenario we just talked about though, you’re most likely to have a shock at the end where that cash to close is going to change by $3,000 to $5,000 based on those taxes and insurance being put in.

So, you got to watch for that.

The other one is just underestimating some other fees.

Good news is we can be limited in that because, especially if it’s an official loan estimate, we got to make sure that those fees are within a certain bound.

For the most part, not necessarily in taxes and insurance, but for title fees and our own fees and stuff, we got to make sure those are within a certain bound.

So, just relatively accurate, but know that the three-way teeter-totter is one thing you got to watch out for.

And then also when you’re really comparing cash to close, especially how much cash you think you need to bring to closing, you need to know, ‘Hey, is that factoring in some kind of estimate for taxes and insurance?’

And then we add in one little nuance to things that really just sometimes irks me a little bit, and that’s when all of a sudden, I get a quote and then all of a sudden you notice, like, ‘that cash to close still looks better.’

Well, there’s one other thing, right?

So, we said we had those prepaids and escrows, and then there’s prorations on principal and interest as well when you go to close.

Little misnomer, some people assume you skip payments in mortgages.

You don’t skip payments.

What happens is if you close one month, it is true that you don’t make that initial payment the next month.

You usually skip to the next month, but you make a pro-rated payment for the month you still close.

So, one of the things that we see that can be a little bit deceiving is when all of a sudden you get a quote and they are assuming only one day of pro-rated interest.

What that means is you have to close on the last day of the month to make sure that your pro-rated interest is as low as it is on that loan estimate or that loan quote.

If you’re closing early in the month, it’s going to be a lot more.

So, if you’re planning on closing, say, the first of the month, you’re maybe missing 30 days of prorated interest – 30 times 50 is $1,500.

So, it can make that loan estimate look a lot better.

So, you better look at what that pro-rated interest day is, when you’re trying to compare different lenders.

Overall though, here’s the thing – you need to ideally be working with someone that’s happy to explain those things in the first place.

You’re ideally getting a reasonable estimate that has on there some kind of estimate for taxes and insurance.

Yes, they’re going to change.

Yes, they’re going to be slightly off, but they’re at least there.

The dangerous ones are when they’re not there and trying to cover up and say, ‘Oh, well, those will be different when you get them.’

Well, it makes it hard to actually compare.

Then your cash to close, you got to be careful about it.

So, ideally, guys, someone that’s being honest upfront and not trying to really skew a loan estimate one way or another.

So, ideally, get an honest deal upfront, someone hopefully just explaining that to you.

Every phone call that I have with someone upfront, having an initial call, that three-way teeter-totter comes up.

Hey, making sure that you understand how lenders are charging you.

And the typical question, you know, the three different ways you get charged, most folks don’t fully understand how those three work together.

The three are like a teeter-totter that all balances.

Those other items we talked about then thereafter, that’s just deeper. Sometimes that’s tough to go through with folks, so you just got to know.

You trust that when we’re getting that quote that they’re going to be on there.

And then we can walk you through that to make sure.

So, know watching this video, though, that there’s a three-way teeter-totter.

There’s a couple of other things you got to consider.

And if you’re working with someone that is constantly changing their quotes and loan estimates and that cash to close just keeps getting bigger and bigger as you’re getting closer to closing, know that you can still always have that reevaluated.

And you want to ideally work with someone that’s making sure that’s as honest as possible upfront.

My name’s Evan Kaufman, your VA loan originator. This is my rant for today, and I guess it has a better tagline than what our other one talking about how we charge you is. So, I hope this helps. If you have any questions, please feel free to reach out. Happy to help you. Take care.