Mortgage brokers are independent professionals who work to bring borrowers and lenders together. Typically, they way they do this is by presenting to clients all the mortgage products of the various lenders with which they work and helping the clients select the product that is right for them. Mortgage brokers do much more than this, though. They also walk the borrower through the entire mortgage application process, helping to gather the right financial information and present it in a way that is as beneficial to the borrower as possible.
The lenders that mortgage brokers deal with quote a “wholesale” price for the loans and allow the brokers themselves to determine how much to mark up the loan. For instance, a particular loan package might have an interest rate of 7.5% and no points. A mortgage broker may make money by marking that up to 7.5% and 2.5 points. Each point is equal to one percent of the whole loan, so on a loan of $200,000 the broker would add $5,000 for his mark up. The broker gets no money until the loan closes, in which case the $5,000 is paid out of the loan proceeds.
There are no guidelines as to how high a mortgage broker can or should set her markup. Thus, in the absence of regulation, brokers will set their markups as high as they can. Borrowers can counter this by educating themselves as to what mortgage brokers do, how they set rates and what typical rates are in their area. Buyers should do some research on the internet and shop around before settling on a mortgage broker. Some buyers are able to force mortgage brokers to cut their rates by threatening to walk away from the deal. Buyers should make sure they aren’t breaking any contractual obligations or incurring a penalty anyhow before doing so.
You might be wondering if you can save money by working directly with the lending institution. Unfortunately, you probably can’t. If you don’t pay a mortgage broker, you will pay the lender who has to pay its employees who work with you through the mortgage process. Further, if you’ve got a good mortgage broker, they can get you the best deal on any particular day or find you good deals for odd circumstances (poor credit, asset-based lending, etc.). So long as you are educated and know how to keep the broker’s prices in check, you will most likely come out ahead by working with a mortgage broker.
Mortgage brokers typically make money through one or a combination of the following:
A standard fee paid directly by the borrower from the borrowers' funds.
A “yield spread premium” or “rebate” paid to the broker by the lender. This requires the borrower to accept a slightly higher interest rate to compensate for the cost to the lender. This rebate may be capped at a certain percentage, usually 3%, of the loan amount and may be accompanied by a prepayment penalty to ensure the cost recovery to the lender. Current mortgage market conditions may prevent some borrowers to qualify for a rebate.
In a refinance loan, the borrower may be qualified for a loan in excess of the amount required to pay the existing lender. This excess may be used to compensate the mortgage broker.