The following is part of a series from jhh wealth focused on navigating the corners of the banking system, to optimize you and/or your business’ finances.
You recently sold some apartments for a big gain, received a large one-time bonus, or made 10x on your investment in a stock.
Your credit is fine, and even with an average income you have saved enough to buy your house with cash. Considering your hard-earned success, you think that it would open the door to better mortgage rates so that you can move into a $1mln+ home.
You then check bankrate.com for the best rates, but:
Is there a problem, (loan) officer?
I wasn’t aware I was speeding (into a maze of bureaucracy).
Maybe you had too much depreciation on your tax return 3 years ago, or your FICO is 690 but needs to be 710. Maybe you earned $500k this year but $200k last year due to last year’s depreciation offset on those apartments you sold. Maybe even your loan is more than the Fannie / Freddie limits.
Unfortunately, in the new era of cumbersome banking regulations, many well-off would-be borrowers don’t often fit neatly into the new bureaucratic checklist. Even though in reality you are a low-risk customer, regulators now make favorable loan terms more difficult to find.
Enter First Republic Bank
First Republic Bank existed to cut through most of these problems. Instead of focusing on a narrow bureaucratic checklist, they would consider the client’s entire financial picture in the underwriting process. This worked well and they were able to offer customers a rate competitive with or better than government subsidized rates.
Exit First Republic Bank
The trick was, they wanted customers’ deposits too. However, all the low-cost mortgages First Republic held meant they could not pay competitive rates on deposits when other banks began paying more. Their income statement turned upside down as depositors left. And that was the end of First Republic Bank.
What about mortgages from big banks?
JP Morgan serves their customers now; their 7% mortgages and strict discipline on terms is not so enticing as First Republic’s.
Like JP Morgan, most lenders cannot do what First Republic did, because they don’t plan to hold your mortgage. They sell them to entities that are regulated by the US government, so applicants become tied to the uncompromising red tape check list that limits a lender’s flexibility.
As an applicant, however you want a lender that will hold onto your mortgage and still give you a rate comparable to a government subsidized “Fannie or Freddie loan”. We all want to have our cake and eat it too but paying an extra $25,000 – $50,000 per year on a mortgage is not optimal.
Where to shop for better mortgage rates now
There are lenders still making cheap mortgages. Some of them charge the same rate for mortgages as they pay for CDs. Haven’t they ever heard of making a profit? Actually, profit is not their focus. There are 4,000 of them and they rarely advertise, even though they are open to almost anyone in the area.
They are credit unions.
You might think these unions are only for firemen or Navy veterans or some other organization, but many actually extend across a broad geography – I am a member of one in Chicago and one in Alabama.
Though you may still run into a number of the roadblocks that made a typical Fannie or Freddie mortgage undesirable, credit unions may provide a better option for you to consider. My mortgage cost me 1%+ less than I would have gotten at a bank. The credit union I work with does not change rates particularly often, so at any given time they may be 0.25% – 0.50% further underpriced (or overpriced) depending on the market.
With that said, many credit unions could seem clunky to those familiar to the services at private banks. You may go through the application process with a credit union and decide their rate is a tad high. In that case, at smaller lenders you may be able to work out a desirable rate directly. We help our clients work through these challenges to find better partners that match any of their particular preferences.
As for First Republic’s cookies, umbrellas and renowned service, credit unions will probably fall short of those perks and I’m afraid they are also gone with the bank. But when looking for a better rate, the opportunity to find aggressive pricing lives on.
(“Mortgage optimization” is one of many banking-related services jhh assists clients with. To go beyond the routine services offering by a typical advisor, be in touch with us)
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