One of the most common frustrations I hear from homebuyers is about mortgage rates and understanding the way mortgages are priced. Back in the early nineties I was a mortgage broker and managed a mortgage office in Crested Butte. In those old days it was virtually unheard of to collect a large service release premium or yield spread premium or otherwise make money on a refinance or purchase money mortgage outside of the origination fee. Of course, nowadays it seems as though lots of loan officers have made a killing from passively or proactively deceiving their customers by not revealing the fact that the mortgage broker is getting paid by the lender for originating an “above par” rate. In my definition- an above par rate is any rate that the lender pays the mortgage broker a fee.
Many people don’t realize that a mortgage broker gets a table of rates each day and possibly as often as several times a day to determine which rates are available at certain prices.
When a potential borrower asks “What’s the rate today?” the mortgage broker searches through the various tables each lender to find the lowest rate available for the financial and creditworthiness of the borrower. The rate that the mortgage broker quotes is typically based on the following factors:
- The loan amount
- Creditworthiness and FICO of the borrower
- Term (like a 30 year fixed rate for example)
- What origination fee the borrower is willing to pay
- How much the loan officer wants to make in commissions
Lets assume factors 1 through 3 are the same in this example that leaves us with origination fee and commissions. A loan officer can price his/her rate to create a wide variety of commissions he/she wants to make. Let’s say that for a particular loan officer it’s been a pretty slow month. When you call he/she wants to make $4,000.00 on your $200,000 mortgage.
Here’s how the math works
assuming the loan officer has the rate sheet in blue. Let’s say you’ve asked for a mortgage quote with no origination fee. Knowing that on your $200,000 mortgage the loan officer would need to make 2% to achieve his/her revenue goal. That entire 2% would come from premium with the associated rate of 6.25%. If you were willing to pay an origination fee, your closing costs would be higher but your rate would be lower. In this case 6%.
Where I think some ill will is created in the mortgage brokerage industry is the scenario when a potential borrower asks for a specific rate or “can you beat 6.125%” and the loan officer prices the loan to make the highest level of commission without disclosing the premium but just barely beats the quoted rate. Using the rate sheet on the right that would be 6% and the loan officer would make 1% in premium plus any origination. Now just so we’re clear I recognize the need for loan officers to make money and I don’t necessarily think they make too much money. Many loan officers I work with work hard, long hours and are very honest and ethical. However I believe that there needs to be more transparency in the pricing model. In fact I am working on a new product that will reveal the various costs and premiums associated with different rates. This should be available in a few weeks.
I look forward to proving buyers with an easy way to have open pricing discussions with loan officers!
If you’re considering a “No Cost” mortgage see my page about how to understand the mechanics of pricing at No Cost Mortgages.
{ 3 comments… read them below or add one }
Hey Real Estate Guy, I like your info! This really shows why you should use a “Banker” rather than a “Broker”. As a Private Mortgage Banker, not only can I offer the ‘lowest’ rate along with the ‘lowest’ fees, the Bank pays me the same % on ever deal I close. That is a sure fire way to make sure your customers get the best deal around…think of it like some of the car companies that pay their sales people on ’salary’. There is no benefit for me to charge one client a higher or lower rate than another client. There are two goals I hope to accomplish, and that is to make sure your client is ‘educated’ that client gets the best deal hassle free.
So keep up the good work and we’ll see you at the closing table!
Caine
Private Mortgage Banker
303-901-1337
Hi Caine,
Thanks for your input. You have a great point that by removing the commission from the equation there is less probability of any ill will. Of course, the benefit of a mortgage broker is that they can “shop” rates among several different lenders and presumably provide their borrowers more rate options– in some cases by reducing their own commissions from what they expected. A future article will cover the differences between Mortgage Brokers and Mortgage Bankers and maybe I can have you discuss the benfits of your services at length!
Hey Bob,
I agree there “once was” a benefit to using a Broker, back when there were many rate options to choose from. However in today’s economy and market, the only real choice comes down to who should I trust with my most expensive asset. Over the last 2 years there have been more banks and mortgage companies close their doors than ever before…and now, banks and brokers have literlly the ’same’ products and typically the same or similar rates. I’d love to take part in a discussion on banks and brokers, so keep me posted.