The “Best Practices in Professional Mortgage Origination” is based upon taking a complicated transaction such as a mortgage and making it easier for the customer to understand the costs and benefits.
One Practice is to provide options on loans and demonstrate how different choices in mortgage options affect the total cost of a mortgage loan.
Take for example how the term of a mortgage affects the costs.
- Shorter term equals higher monthly payments but much fewer of them.
- Shorter term provides lower interest rates by as much as 1/2 to 1%.
- Shorter term saves as much as 2/3’s of the total interest costs.
For example, take a 4.25% mortgage with an original balance of $300,000 taken out on January 1, 2015 and compare it to a rate and term refinance at 2.5% over a 15 year term.
By entering the original balance and loan date the current balance and remaining term can easily be calculated.
Assume the closing costs are $3,000.
To compare the loans we would adjust the loan balance to the current amount due with the remaining term on the loan. In this case the present balance is $270,900.
To refinance and eliminate the need for the borrower to come to closing with cash increase the new loan amount by the $3,000 of closing costs.
With a new loan of $273,900 over a 15 year term, the total interest saved is $112,607 or 67% of the interest.
When showing the options it is a good idea to simplify the information into components to offer a way for the customer to best use the analysis.
Many customers are not only interested in the savings over the 15 years but also identifying the breakeven point or over 5, 10 or 15 years.
To simplify calculations only principal and interest will be considered. Other payments for taxes, insurance and homeowners dues should be clearly disclosed in the loan estimate.
Try it for yourself or give this link to a customer to play with. HERE.
Check out Mortgage Professional Practices or Contact Deb Killian firstname.lastname@example.org