Will new mortgage laws reduce consumer choice?

Posted by  on May 15, 2012

Chances are good that the last time you requested mortgage quotes from lenders, they looked something like this:

  • No-cost mortgage: 6.5%
  • Loan with no points: 6.0%
  • Loan with a half-point origination fee: 5.875%
  • Loan with a one-point origination fee: 5.75%
  • Loan with an origination fee plus one-half discount point: 5.625%
  • Loan with an origination fee plus one discount point: 5.5%

Mortgage quotes: par, rebate, and discount

The loan agent was able to offer a range of mortgage rates at varying prices because of the way loans are priced. Loans may be offered at par pricing, which costs the borrower nothing. He or she only pays the costs of originating the mortgage, which includes lender fees, title insurance and an appraisal.

Mortgages are also offered at higher rates, or rebate pricing. Borrowers who want to buy a home or refinance a mortgage and pay no fees at all choose this option. When borrowers select a higher mortgage rate, the lender is able to rebate the extra profit to cover loan costs.

Then, there is discount pricing, for borrowers who want to get the best mortgage rate. Discount pricing allows borrowers to pay extra, and the lender uses the additional fee to purchase the lower, discounted rate.

Some of the choices above involve a combination of pricing structures. For example, if the lender needs to make 1 percent on a loan (one point) to stay in business, it can get that point from the investors, who fund the mortgage, it can get it from the borrower, or it can get some from each, say .75% from the investors and .25% from the borrower.

Reforms prohibit some options

The new laws may take some of these options off the table. The wording seems to preclude lenders from collecting fees simultaneously from the investors and the borrowers for the same loan. While it was probably intended to keep some lenders from collecting double fees, its wording may keep lenders from offering choices that involve equitably splitting the fees between investors and borrowers, according to a report in The Washington Times.

What can you do?

What goes on behind the scenes needn't affect you. Decide first what you want to pay for your mortgage loan--no fees, just third-party fees (no lender charges), ordinary lender charges, or discount points--and then ask the best mortgage lenders what rate is available for what you are willing to pay. By equalizing all of the fees across the board, you only need to choose the lowest interest rate.


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