Real Costs of a Loan through a Mortgage Broker
Now we'll give you an idea of how the mortgage broker makes his/her money from a deal. Pay close attention and you will see that there are many ways to skim off the top of a deal. The following are the real costs (costs that every loan has and which the broker makes no money on):
- Appraisal
- Title fees: title insurance, recording fees, title paperwork preparation
- A processing fee (cost of hiring employees to process the loan)
- Mortgage insurance (for loans over 80% of the property's worth)
- Pre-paid interest
- Credit report fees
- Inspection fees (generally termite inspection)
(For a more detailed description of these costs, see our detailed cost section.)
*Gasp*. Yes, that's it. The rest of the fees are split by the mortgage broker and the loan officer. No, I didn't forget about the origination fee.
Mortgage brokers "buy" loans from a bank and "sell" them to customers. Every bank has a "par" rate: a mortgage rate at which the broker does not have to pay a fee in order to "buy" the loan. An interest rate lower than the par rate would cost the broker money; an interest rate higher than the par rate would pay the broker a commission.
Following so far? If a mortgage broker gave you a loan at the par rate, and only charged you appraisal, processing fee, title and credit report fees, he or she wouldn't make a dime from the deal. Remember, a broker collects no interest from the loan, or the servicing fees. The broker only collects a commission from the mortgage which actually lends the consumer the money.
Some brokers have limitations on how much a loan officer can charge in fees - the loan application fee, the origination fee and the points. However, most brokers split the profit earned from every loan with the loan officer. Can you see how it is in the interest of a loan officer to charge you more points and fees? It's money in their pocket.
Of course, the brokers should be paid something for their services. The "normal fees" in the industry are an origination fee (1 point) plus one additional point. What's a point? A point is 1% of the total loan amount. For example, one point on a loan amount of $50,000 is $500 dollars.
The terms of a loan when dealing with a mortgage broker are very flexible. To illustrate this point: Don't want to/can't pay a lot of loan fees? Will it keep you from getting your loan? As a solution, the broker can raise the interest rate on your loan. How does this help? If the loan officer sells you a loan above the par interest rate (the interest rate at which a loan costs nothing and pays the broker no fees), he will receive a commission from the bank selling him the loan. He still gets his money and you pay no loan fees. You will, however be paying these points in the form of extra interest for the life of the loan, which is much more expensive than paying the points up front at closing.
Okay. You can pay a higher interest rate in lieu of points on your mortgage if you can't afford the up-front costs at closing.
In the reverse situation, if you wanted a loan at an interest rate which was lower than the par rate, the bank selling the loan charges the broker extra money for it, a cost he/she passes on to you in the form of points. You will pay higher costs up-front at closing and less over the life of the loan due to a lower interest rate.
When a broker receives points from the bank for charging a higher interest than the par rate, this is called getting points on the backside.
The reverse situation is paying extra points for a lower interest rate. This is called buying down the interest rate.
What if you suspect that your loan officer jacked up your interest rate to get more commission (he received points on the back) and didn't tell you about it? It does happen.
Ask him or her. If you're not satisfied with the answer you can always figure out how much "extra" money the broker received by looking at your closing statement from the title company. Your title officer will gladly point it out. However, at this stage of the game, you're usually signing loan documents and it's too late to do anything about it short of cancelling the deal. If you notice your mortgage company is getting three points on the back (meaning the interest rate you're getting is much higher than the par rate) you can always walk out on the deal. Some loan officers count on the fact that the moving van containing all your worldly possessions is parked outside and you won't do that.
Fees to watch out for
- Points
Keep in mind, some brokers won't let their loan officers charge less than one point origination plus one point (known in the industry as one and one). But some do. ALWAYS shop around, especially if you have A credit. Some loan officers will charge you less if they know your loan will be a piece of cake to put through the system.
- Application fees
Application fees are non-refundable and they are 100% pure profit for the mortgage broker. Walk out if they ask for an application fee up front.
The only exception to this rule: if you have tough credit. In this case, the loan officer will have to do a lot of work before they can tell if your loan will go through. Time is money and they want to be paid for this effort. If your loan gets denied without an application fee up front, the loan officer put in a lot of hours for nothing.
Do you have a question we haven't answered? Call us! E-mail us! or Buy the Book!
Document last modified Monday, 21-Jun-2004 18:00:39 EDT
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