Riverside Realtor Blog - Alma Dizon

Alma shares her experiences and observations as a Realtor in Riverside California.

Sunday, July 29, 2007

How does your refi company make money?

My parents have been looking at new loans for them, and it's been a confusing time for them trying to see all the differences between the choices they have.

At first, they were going to go with the lowest interest rate, and then they realized that the loan would be for about 10k more than they currently owe. As I explained to them, that's because the mortgage broker was charging them almost 10k for the refi, but that rather than charging them upfront (and probably giving them cause to run away), he was spreading it out over the life of the loan. The monthly payment was lower than they'd be with the other company they were considering, but it came at a price.

My parents weren't too happy with the idea of increasing the principal. As it was, their previous lender had fooled them into an option ARM, and their principal had already increased over 11k before they'd fully realized what was happening.

So now they're looking at a mortgage banker who will charge only $450 for the refi but will use a higher interest rate. As I explained to my parents, the higher interest rate is how his company makes money, particularly since they say that they never sell their loans (very unusual). The second company additionally says it will lower the interest rate .25% if my parents open another account with them, such as a credit card or an IRA.

I told my parents that all companies have to turn a profit somehow, so the only way to choose is for them to ask themselves what is their most important goal. After all, as they're now in their 80s, they really need the lowest payment. They don't want to have to refi soon as this is likely the last time when they'll be able to handle it, so the payment needs to stay stable for a while but probably not for more than 10 years. They also need to talk to an estate planner to bring the whole picture together.

On the other hand, they have a real problem at their age with getting into more debt in order to help someone else make a living. And I can't say I blame them.


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