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Table of Contents
Now for the biggest secret of all, ready? All banks have access to the same rates and the only reason everyone ends up with a different rate is directly related to how much your loan officer and bank is going to profit from you.
You should probably read that one again.
Your loan officer gets paid like all sales people, either by;
- Salary plus commission
- Commission only
If you walk directly into a bank the loan officer most likely receives a basic salary and a percentage of the loan origination fee (points and yield spread premiums). If you work with a broker the broker usually works on a straight commission (points and yield spread premiums).
The least experienced loan officers usually start off working for a local bank and if they are successful and survive in the business climb up the corporate ladder or eventually move on their own by becoming a broker. Becoming a broker allows the loan officer the ability to offer their customers with the most options.
It always amazes me when I see TV commercials or hear radio commercials advertising $395, zero closing costs. I always wonder if people understand how they can do that.
Ok, here is how it is done.
The inside secret is that in exchange for these low or zero closing costs the lenders will make their profits and cover the costs of the loan by charging you a higher interest rate over the life of the loan.
By charging you a higher interest rate over the life of the loan the bank can make a small fortune Think about it, what kind of loan fees are you paying over the life of the loan in exchange for no upfront loan fees?
The most important thing to remember is that you want the best loan available at a fair price/fee with an experienced construction loan officer that will look out for you and provide you with excellent service for their fee.
By the way all banks and brokers on average earn anywhere from .500% to 1.500% points on a construction loan. One point is one percentage point of the loan amount, so 1 percentage point on a $417,000 loan amount is $4,170.
Remember you can have a no fee loan all day long but you will pay dearly over the life of the loan with a higher interest rate. Let's pretend your loan officer offers you a zero loan fee construction loan. In order for the bank or loan officer to offer that "benefit" the interest rate will need to be increased.
If you increase the interest rate just a .250% on a $417,000 loan amount the profit to the bank paid by you is a whopping $24,480, over the life of the loan. You should probably read that one over and over until it sinks in.
In the long term it is far better to pay the loan officers origination or broker fee at par pricing then it is to be sold on the low or no fee program unless you do not plan on living in the home for very long.
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