Mortgage brokers are often paid in different ways for their services, and homebuyers need to educate themselves on these payment methods as it could potentially save them thousands of dollars on their mortgage.
Since lenders are using their own funds to extend a mortgage, it is usual for them to charge an origination fee of 0.5% to 1% of the value of the loan. This fee is paid along with the mortgage payments which can increase the amount of the mortgage’s interest rate and the overall cost of the home. For example, a 30 year, $200,000 loan with a 6% interest rate may incur a 2% origination fee of $4,000. The monthly mortgage payment will be approximately $588.89; however, when the origination fee is divided out over the life of the 30-year loan, the payments are increased by $11.11 per month to $600. The homeowner is actually paying an 8% interest rate rather than the 6% rate which significantly increases the total cost of the loan.
Yield Spread Premium
Mortgage lenders often use funds from depositors or will borrow money from a larger bank at a low-interest rate to extend loans to their customers. The yield spread premium is the difference between the interest rate that the lender charges the homeowner and the rate paid by the lender to replace borrowed money. The mortgage lender website at communitylendingcentre.com
An example of this is when the lender borrows money at a 4% interest rate and offers a mortgage at 6% interest, effectively earning 2% interest on the loan.
— Leonard Kiefer (@lenkiefer) January 19, 2018
A portion of the loan (referred to as the discount point) may be due at closing to buy down the interest rate on the mortgage. One discount point is equal to 1% of the mortgage amount and may reduce the loan by anywhere between 0.125% to 0.25%. For example, on a $200,000 mortgage, two points is 2% of the loan amount, or $4,000. Paying points upfront can lower the monthly mortgage payments and save the homeowner a lot of money over the course of the loan. The amount by which the interest rate is lowered depends on the lender, the type of mortgage chosen and the current market conditions. Homebuyers must ensure that the mortgage broker explains exactly how paying discount points will impact the interest rate on their mortgage.
There are many other fees due at closing in addition to the origination fee, such as the loan application fee, processing fees, and underwriting fees. These costs may vary by lender, and they should be set out in the Good Faith Estimate that is provided. Homebuyers must carefully read through the closing fees and ask the lender any questions before choosing a mortgage to determine whether any of these charges can be negotiated. This could potentially save a lot of money by comparing closing costs between lenders.
After closing on mortgages, lenders may decide to group together a bunch of different loans into what is known as mortgage-backed securities. These are then sold for a profit to free up capital so that lenders can extend additional mortgages to homebuyers and earn more income. Mortgage-backed securities are often purchased by pension fund administrators, insurance companies, and other institutional investors as long-term income.
Lenders may earn revenue by servicing the loans contained in the mortgage-backed securities that they sell. If the purchasers of these securities are unable to process the mortgage payments and handle the administrative tasks of these loans, the lenders may perform the tasks for a fee or a small percentage of the mortgage value.
Homebuyers are faced with substantial expenses when trying to obtain a mortgage; therefore, it is important to understand how lenders make their money. Understanding this process can help the homebuyer save thousands of dollars on their mortgage and feel more comfortable with the purchase.