September 4, 2017
Orion’s AEs hear from our brokers that they are often asked by clients, “Should we pay points for a lower interest rate or select a higher interest rate with a lender credit for the rate chosen?” As a broker, how do you coach the loan officer to answer that? To determine the right answer, the LO should remind the client that an analysis is done for each borrower, and that this is a service that is rarely done by our competitors, and Orion’s brokers can add value.
Our brokers know that there are multiple rate options for a given borrower’s scenario. For example, for a fixed rate loan there are often 20 or more different rate points/lender credit options. The range was from a low rate paying 10 points to a high rate with a lender credit of 5 points, resulting in rates, for a 30-year fixed-rate loan, ranging from the high 2% area (with a cost of tens of thousands of dollars) to the mid-5% area with a lender credit of tens of thousands of dollars.
Giving a borrower all the options doesn’t always work well, so experienced brokers often narrow the choices to 4-5 alternatives. These often consist of 1 or 2 with paying points, a no point option, and 1 or 2 with lender credit pricing, and a spreadsheet is given to the borrower with different rates and the payment associated with that rate the points or lender credit associated with the rate.
The broker should help determine if the lender credit is needed to get in the door, and contrast that versus concern about the borrower qualifying with a higher rate. For those borrowers that do not need the rebate funds there are other factors to consider, like how long are you going to keep the property and which one of these rates is the best value?
The broker should look at is the cost (points) of changing the rate 1/8 versus the savings per month in the monthly payment. This gives us the pay back in months (cost difference divided by savings difference). The cost of changing the rate by 1/8 is not the same for all options, but usually when you are lowering the rate, the cost to drive the rate down increases. Conversely increasing the rate to get a higher lender credit compresses the amount of the rebate per 1/8 change in rate.
Orion’s experienced brokers know that pricing often depends on how long the borrower is going to keep the property. In the long run, the lowest rate is going to be better, but it is going to cost the borrower up front. Then again, does the borrower need a rebate to close escrow? Answering these questions is one way that a broker can add value!