How would you feel if you took your car to your dealership for repair, and you found out that a manufacturer’s rebate, that should have been given to you, was instead pocketed by the dealership? Ripped off and mad as hell, that’s how you would feel! This is exactly what can happen when you get a mortgage. Let me tell you how you can keep this from happening to you.
I have been a Mortgage Broker for 21 years and am still in the business. At one point in the past I was guilty of this transgression (greed) but have learned the error of my ways years ago.
So follow me closely on this, as it is a little complicated.
You first need to understand how a Loan Broker gets paid. There are two ways to get paid. The first is for the Broker to charge a fee called a “Loan Origination Fee” also known as “Points”. A Point is 1% of the loan amount. If the new loan request is for $200,000 and the quote is for a rate of 5.5% at 1 Point Origination Fee, the Broker will make $2,000 on the transaction. The acceptable fee in our business is 1 Point. This is considered “Just compensation for services rendered”.
The second and least understood way of getting paid is Thu something called “Yield Spread Premium” or “Service Release Premium” which is paid by the Lender to the Broker for originating a loan. This is the equivalent of the “Manufacturer’s Rebate” and is paid to the Broker by the Lender in certain situations.
It is entirely possible for a Broker to make 1 Point Origination Fee from the Borrower, and to also receive a 1 point Rebate from the Lender on the same loan. In our example this would mean that the Broker would make $4,000 from the transaction! And the Borrower would be unaware of it.
The ethical Broker should accept this “Yield Spread Premium” Rebate from the Lender as the ONLY payment and charge the Borrower 0 Points.
Once you understand how Broker compensation works, you can ask your Broker to show you how much they will make, and to hold them to this figure. You can ask to see the proof from the Lender as to what Yield Spread Premium Rebate is being paid, if any. If the Broker refuses or gives some excuse as to why they can’t do this, you will know that you have a scoundrel in your cross hairs, who has been found out! Or, you will suddenly find the interest rate quoted you has magically improved. Either way, You Win!