I have been in the mortgage industry for several years. I have always taken a great deal of pride in the fact that my clients are always well informed every step of the way. In that spirit, I would like to explain exactly how mortgage brokers get paid and what that means in relation to rates and fees.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandated that mortgage brokers may no longer be compensated directly by consumers. We are only allowed to be compensated by the lender based on a bonus structure for number of loans or in relation to the loan amount. In addition, it stipulated that lenders cannot charge a higher rate than what the borrower qualifies for. Consequently, as a mortgage broker we are on a set compensation contract (based on percentages of the loan amount) with all of our respective lenders. This is important as it pertains to your rate and closing costs or lack there of.

Example:

$100,000 mortgage
Compensation Level: 1%
-The broker will be compensated 1% of the loan amount or $1,000 (This is the exact amount the lender has to be compensated. It cannot be more and it actually cannot be less)

Each lender has different lender fees and there are always 3rd party title fees as well.
Let's assume the lender fees are $1,200 and title is $800. This adds up to $2,000

Here is an example of how rates and their premiums look to us:

Rate Premium

3.50% 1.00

3.625% 1.50

3.75% 2.50

4.00% 3.00

-In the example above, if you chose the 3.50% rate, you would have to pay the lender fees and title fees of $2,000 since the premium associated with that rates is 1.00 which exactly matches the brokers set contract for compensation and there is nothing 'left over.'
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-If you went with the 3.625% rate you would pay $1,500 since the premium is 1.50. The 1 goes to the broker and the 'extra' .5 goes toward covering your closing costs. In this case it would be .5% of $100,000 which is $500.
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-If you went with the 3.75% rate you would pay $500. Again, 1 would go to the broker and the 'extra' 1.5 goes toward covering closing costs.
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-If you went with the 4.00% you would not pay anything- i.e. a No Closing Cost Loan. Again, the 1 goes to the broker and the 'extra' 2 go toward closing costs. In this case 2% of $100,000 is $2,000.

As you can see this is all based on percentages. The higher the loan amount, the higher the premium winds up being. Also, please note that premiums are not incremental. Often times there is a big spread between different rates even if the rates are only separated by 1/8 of a percent. This is because mortgages are packaged together and securitized. The spread will depend on what coupon (rate) investors are trading at a given moment.

Ahead of Bernanke's speech tomorrow and the expected volatility in the market I thought I would give you some insight. Also, please keep in mind that the Guarantee fee is being raised by government mandate and consumers are expected to incur the cost in the form of lower premiums or higher interest rates.

I hope this has been helpful. Please feel free to contact me with any questions or if you would like a quote. 847.322.4720 matt@smartmtgs.net