Searching for a mortgage is a complex process. As a borrower you want the lowest rate and best terms, but attaining such results is not easy. Do you go for a low rate and more points? No points and a somewhat higher rate? How about a loan with a higher rate but no costs at closing? And do you lock-in today or hope rates decline and "float" with the market?

Not only is lending complex, the process is also mysterious. What is the role of the loan officer? Is this person your advocate or merely a salesperson? Does the manner in which the loan officer is paid raise or lower your mortgage cost?

There isn't enough space here to describe the complete mortgage marketing process, but in general terms let's say you can obtain financing at "par" pricing -- that means the price of a loan with no points. For instance, 7 percent interest and no points.

The very same loan can also be available with different combinations of rates and points -- "points" are nothing more than interest paid up-front at closing. One point equals 1 percent of the loan amount. If you borrow $200,000 a single point at closing would be worth $2,000.

In addition to 7 percent and no points you might also have other options:

• 6.50 percent and 1.875 points
• 6.75 percent and 1.25 points
• 6.875 percent and .625 points
• 7 percent and 0 points
• 7.125 percent and -.625 points
• 7.25 percent and -1.25 points
• 7.375 percent and -1.875 points

An informed consumer now has some choices. If you expect to stay in a home for a long time, maybe you pay 1.25 points up front to reduce your long-term rate. If cash is short, perhaps you go for 7.375 percent (7 3/8ths) and have the lender pay some or all of your costs at closing.

So far you can see some rough equivalence. The basic interest rate is 7 percent but you can tailor that rate to meet your financial needs -- assuming you know what the basic rate is.

But rates change constantly so -- as a consumer -- you may not have the latest rate information. You can get a good idea regarding rates by speaking to various loan officers and checking online sites, but even then rates are still in flux.

Since the consumer is unlikely to know the basic rate, the lender has an advantage. For instance, in a market with a basic rate at this moment of 7 percent and no points, you could be told that the best available rate is 7 percent plus 1 point.

To you, the best rate is now 7 percent plus 1 point. To your lender, the best rate is 7 percent and no points. The difference in this example is one point, or $2,000 for a $200,000 loan.

Is it fair or reasonable for a lender to charge more than the basic rate, a "yield-spread premium" or "overage" as those inside the industry call such fees?

"Overages," explains the Federal Reserve, "are the difference between the lowest available price and any higher price that the home buyer agrees to pay for the loan. Loan officers and brokers are often allowed to keep some or all of this difference as extra compensation."

No one asks about the compensation to a salesperson or a store's mark-up when buying sofas, computers, or guitar strings. We understand there is a wholesale cost to such commodities and that a retailer will want to get the highest price -- and the biggest profit -- possible.

But the comparison between loans and commodities is not quite exact. There's a price tag on sofas and such, so everyone who goes into the store has the same shot at the same price.

That's not true with cars -- where the "list" price is a fiction -- and it's not true with mortgages. In each case, the salesperson can negotiate with the consumer to get the best possible price, in large measure because the true price is unknown to the consumer. And in both cases the salesperson who negotiates such deals daily is far better prepared to bargain than consumers who try their luck every few years.

So, should we require all lenders to charge the same price for a standard array of loan products? Why should lenders be denied the right to earn as much profit as possible? And suppose that a loan with overage is still priced below any other available loan -- is the consumer in this case getting a bad deal? Is it wrong for a salesperson to sell a mortgage from one investor with a higher mark-up than an equivalent mortgage which produces less profit?

None of these are easy questions. We certainly don't tell lawyers they're overcharging when they're paid huge contingency fees for class-action settlements. We don't complain when ballplayers get $10 million a year. And there are few complaints when corporate executives earn millions of dollars in stock options -- or at least there are few complaints when stock prices are rising.

Should we limit lender profits? If yes, what about profits for your business or profession?

Our credit rules require that lenders disclose their fees, so for the moment the key to the matter of overages is to be an informed consumer.

Ask lenders for the par price -- the basic interest rate at this moment without points. Then ask about other rate-and-point options for the same loan. Ask about fees and charges -- they are a cost to you. Ask if both the interest rate and points can be locked-in. Ask if the price quote includes any overage. If yes, how much? Ask if there is a cost to lock-in and if the lock-in includes a "float-down" provision -- generally one opportunity to lock at a lower rate before closing. Shop around -- both online and off. Get lender recommendations from local brokers who are active in the marketplace.

And do something else.

Take a little time and read some of the excellent material posted online regarding overages. You could save thousands of dollars.

Direct Resource Links

• Federal Deposit Insurance Corporation

• Federal Trade Commission

• HUD

• Mortgage Bankers Association of America.

• The National Consumer Law Center

• Rules for the Real Estate Settlement and Procedures Act

• State of New York Banking Department.

For more articles by Peter G. Miller, please press here.

Published: July 17, 2001

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