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Mortgage lenders may get paid in multiple ways that are part of the home-buying process. For example, lenders can make money from closing costs, origination fees, and mortgage-backed securities. When homebuyers educate themselves on these methods, they may be able to save thousands of dollars on their mortgage.
Key Takeaways
- Mortgage lenders can make money in various ways, including origination fees, yield spread premiums, discount points, closing costs, mortgage-backed securities (MBS), and loan servicing.
- Closing costs fees that lenders may make money from include application, processing, underwriting, loan lock, and other fees.
- The mortgage lender also earns a spread between the rate they borrow from larger banks and the rate charged to borrowers.
- Mortgage-backed securities enable lenders to profit by packaging and selling loans. Lenders may also receive revenue from servicing the loans packaged and sold through MBS.
Origination Fees
Because lenders use their funds when extending mortgages, they typically charge an origination fee of 0.5% to 1% of the loan value, which is due with mortgage payments. This fee increases the overall interest rate paid—also known as the annual percentage rate (APR)—on a mortgage and the total cost of the home. The APR is the mortgage interest rate plus other charges.
For example, say a $200,000 loan with a 6% interest rate over 30 years has a 1% origination fee. Thus, the homebuyer origination fee is $2,000. If the homeowner decides to finance the origination fee along with the loan amount, this will effectively increase their interest rate, calculated as the APR.
Yield Spread Premium
Mortgage lenders use funds from their depositors or borrow money from larger banks at lower interest rates to extend loans. The difference between the interest rate that the lender charges homeowners for extending a mortgage and the rate the lender pays for replacing the money borrowed is the yield spread premium (YSP). For example, the lender borrows funds at 4% interest and extends a mortgage at 6% interest, earning a 2% spread in interest on the loan.
Discount Points
Part of the loan, known as a discount point, might be due at closing to help buy down the mortgage’s interest rate. One discount point equals 1% of the mortgage amount and may reduce the loan amount by 0.125% to 0.25%. For example, two points on a $200,000 mortgage are 2% of the loan amount, or $4,000.
Paying points upfront typically lowers monthly loan payments, which saves homeowners money over the life of the loan. The extent to which the interest rate is lowered depends on the chosen lender, type of mortgage, and market conditions. Homebuyers should ensure that lenders explain how paying discount points affects the interest rate on their mortgage.
Closing Costs
Closing costs encompass various charges and fees from the parties involved in facilitating the purchase or sale of a home. Typically, the home buyer pays the closing costs upfront during the closing—when you sign the loan documents.
Below are some of the fees charged to a home buyer during a mortgage closing:
- Appraisal fees
- Title insurance
- Loan origination fee
- Rate lock fee
- Processing fee
- Underwriting fee
- Government and property taxes
- Homeowners insurance payment
- Mortgage loan interest until your first payment
Because these closing costs may vary by lender, the fees are explained upfront in the good faith estimate (GFE).
Homebuyers should carefully review the list of fees and consult with the lender before deciding on a mortgage to determine whether the homebuyer may negotiate certain charges or save money by doing business with another lender.
Mortgage-Backed Securities
After closing on different types of mortgages, lenders will group loans of varying profit levels into mortgage-backed securities and sell them for a profit. This frees up money for the lenders to extend additional mortgages and earn more income. Pension funds, insurance companies, and other institutional investors purchase the MBS for long-term income.
Important
Selling mortgage-backed securities can free up capital to make additional loans.
Loan Servicing
Lenders may continue to earn revenue by servicing the loans in the mortgage-backed securities they sell. If the MBS purchasers are unable to process mortgage payments and handle the administrative tasks involved in loan servicing, the lenders may perform these tasks for a small percentage of the mortgage value or a predetermined fee.
How Does a Mortgage Lender Make Money?
Lenders make money from origination fees, yield spread premiums, discount points, closing costs, mortgage-backed securities (MBS), and loan servicing.
How Much Money Does a Loan Officer Make?
Although income levels vary by location and experience, a loan officer earns a salary of $79,825 per year.
What Is the Difference Between a Mortgage Lender and a Mortgage Broker?
A mortgage lender represents the financial provider that directly lends you the funds to buy a home from the seller. A mortgage broker acts as an intermediary for you and lenders to help borrowers shop around for the best financial terms from lenders. Typically, a broker does not lend money; however, some banks may act as both a broker and a lender.
What Is the Average Fee for a Mortgage Broker?
The average fee that a mortgage broker charges can range from 1% to 2.5%.
The Bottom Line
Homebuyers face substantial expenses when financing the purchase of a home using a mortgage. It’s important to determine how much your mortgage lender will get paid. When a homebuyer educates themselves on the process, they can find ways to save thousands of dollars by shopping around for their mortgage and feel more secure about the purchase.
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