My Way Credit

In a recent press release, the Federal Housing Finance Agency said of the loans originated by Fannie Mae and Freddie Mac, "Forty-seven percent of the purchase-money mortgage loans originated in February were 'no-point' mortgages."  This shows how poorly informed forty-seven percent of borrower are.  I'll explain why.

No point loans are possible because Fannie and Freddie will pay more for higher-yield loans.  They do this because it is more profitable. But lending is a zero-sum game! One party wins and the other party loses. If it is more profitable to the lender, then it is more costly to the consumer. Why would borrowers make choices that are costly to them?

The answer is that they do not know what they are doing. Well at least 47% of them don't know what they are doing. Let's go back to basics. 

The purpose of 30-year fixed-rate loan is to provide long term rate protection. So theoretically you wouldn't get such a loan if you weren't going to stay in the home for a while.  And with rates this low, it is highly unlikely that you would have an opportunity to refinance into a better loan. Thus you are going to have this loan for along time.

Here's where agency pricing comes in. Remember, if they can get you to pay more interest for a long time, they make more money. How much?

The trade off of rate versus fee traditionally was a ¼% reduction in rate for a 1 point fee. That's a four year breakeven. Every year your interest expense is ¼% lower, $250 for every $100,000 in loan amount. The 1 point was $1,000 and every year you save $250 and at the end of four years you have the $1,000 back.  Thereafter, you still save $250 every year. Anyone who was going to own his home longer than 4 years should have taken that deal.

But when the government took over Fannie and Freddie they changed the pricing formula. Now zero point loans are much more expensive.  If you paid 1 point today you could get 4.75%.  A zero point loan is 5.25%. That's a ½% difference, TWICE what it used to be. That means it is TWICE as costly for consumers and they still won't learn.

Here is a comparison of costs and interest on a $250,000 loan over ten years. In this example, we kept the payment the same which coverts all the interest savings to principal reduction.

Rate          Interest      Points      Total      Balance in 10 years

5.25%         120,532       0          120,532      204,870 

4.75          105,762       2,500      108,262      190,101 

Difference                                  12,270        16,963

So pay an extra $2,500 upfront and collect $16,963 at the end of 10 years. That is the best part of getting a loan because you actually get your money back!!!!!

Frankly, our government people including Barney Frank and Chris Dodd and the people at HUD don't get it either. They keep saying that no point loans "lower the cost to consumers."  The only reason they say this is that they think that the $2,500 reduction really does save consumers money. They don't see that it costs consumers almost 7 times as the phantom savings.  Pretty stupid, isn't it.

We all know about caller ID, the service that displays the phone number and/or name of the person calling you.  That allows you to know what to say when you pick up the phone. Remember that the caller is calling you at his convenience, which may or may not be at your convenience. Maybe you are doing something more important and you don’t want interrupted just then.

My phone system does not have that feature, but that's OK. Almost all my calls are from clients and friends, all of whom I want to talk with. But I also get occasional calls from the public.  Sometimes it's some guy selling "leads" and I just tell them politely that I'm not interested and hang up.

Sometimes it's someone who might become a client, and we like those calls! Well, usually we like those calls, but not always. I live in an area populated by many successful people and one of the nice things about dealing with these people is that they are smart. I like that because folks like that are willing to acknowledge my expertise. After all, my job is to help them and they like that. My business is built on that.

Not everyone has had the educational opportunities that others have had. Some other people, bluntly, aren't as smart as others.  And that's OK too because it creates an even greater need for my teaching skill.  As long as they want my help, are willing to see the benefits of getting an education, I am happy to help them. I take great pride in having helped people of more humble origins.

But not everyone sees my role like that. Sometimes we get someone who not only is ignorant, they don't want to correct their ignorance by availing themselves of my talents.  How can I help someone who is not willing to acknowledge that he needs help?  Some people like that start out the conversation, "What are your costs?" Other act as if they know more about mortgages than I do. Not hardly.

It's at times like that I wish my phone had a caller IQ feature that would identify the IQ of the caller.  It would give me a better heads up on how to deal with them.

More to the point, when you are shopping for a mortgage or for other professional services, you don’t want to appear to have an IQ that is a lot lower than it really is. That’s not going to serve you well.

After all, all of us have huge areas of ignorance. We all have some area of expertise that allows us to be successful in some field. But we are really ignorant in many other areas. Smart people just know enough to admit it and seek help from someone who will eliminate some of that ignorance.

We all know about caller ID, the service that displays the phone number and/or name of the person calling you.  That allows you to know what to say when you pick up the phone. Remember that the caller is calling you at his convenience, which may or may not be at your convenience. Maybe you are doing something more important and you don’t want interrupted just then.

My phone system does not have that feature, but that's OK. Almost all my calls are from clients and friends, all of whom I want to talk with. But I also get occasional calls from the public.  Sometimes it's some guy selling "leads" and I just tell them politely that I'm not interested and hang up.

Sometimes it's someone who might become a client, and we like those calls! Well, usually we like those calls, but not always. I live in an area populated by many successful people and one of the nice things about dealing with these people is that they are smart. I like that because folks like that are willing to acknowledge my expertise. After all, my job is to help them and they like that. My business is built on that.

Not everyone has had the educational opportunities that others have had. Some other people, bluntly, aren't as smart as others.  And that's OK too because it creates an even greater need for my teaching skill.  As long as they want my help, are willing to see the benefits of getting an education, I am happy to help them. I take great pride in having helped people of more humble origins.

But not everyone sees my role like that. Sometimes we get someone who not only is ignorant, they don't want to correct their ignorance by availing themselves of my talents.  How can I help someone who is not willing to acknowledge that he needs help?  Some people like that start out the conversation, "What are your costs?" Other act as if they know more about mortgages than I do. Not hardly.

It's at times like that I wish my phone had a caller IQ feature that would identify the IQ of the caller.  It would give me a better heads up on how to deal with them.

More to the point, when you are shopping for a mortgage or for other professional services, you don’t want to appear to have an IQ that is a lot lower than it really is. That’s not going to serve you well.

After all, all of us have huge areas of ignorance. We all have some area of expertise that allows us to be successful in some field. But we are really ignorant in many other areas. Smart people just know enough to admit it and seek help from someone who will eliminate some of that ignorance.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.