How do Mortgage Companies Make Their Money ?
Generally mortgage companies will make their money from the fees they generate on the front end of the loan, such as points being paid to buy down the rate, under writing fees, document prep fees, and alot of other miscellaneous fees, also referred to as junk fees that all add up to some tidy profits for these mortgage companies. However the main basis from where they make their profit is from selling your loans on the open market.
How it works is that they will take a pool of approximately 30-40 mortgages loans that could total up to 2-3 million dollars, and then they will turn around and sell them on the secondary market. In other words they will pull them up and take them to Wall Street in where there are investment companies that will purchase those loans, because it can give them a nice residual income from the interest rates paid by the borrower.
mortgage broker
When an investment company does purchase a loan, general the mortgage company will make approximately 1-3 percent of the total value of the loan in what is called the service release premium. This is where they allow these investors to come in and purchase these loans and the mortgage companies get a pay to fee for that.
What the mortgage company does then is that they take the money that they have just been paid back on all of those loans plus a 1 to 3 percent profit and turn around and start the process again.
How do brokers make their money ?
Mortgage brokers get paid typically on the percentage of the loan amount. That percentage can vary anywhere from a 1/2 percent to as much as 2 percent, however, in general, a legitimate mortgage company will make anywhere between 1 point and a 1.25 percent. That would considered a decent percentage also know as parity pricing. If a broker has a relationship with a particular bank for example, the banks will usually pay the mortgage broker a point or point and a half to deliver a loan that is basically ready to close. This means it would have the appraisal covered, all the verification of borrowers income and assets would be done as well.
Many banks are willing to offer these percentage points to brokers because it can save the banks a lot of money by outsourcing the paperwork instead of paying a full time staff . This way they don’t have to pay a loan originator, nor pay for an appraiser. All the particulars that go into making a mortgage can get quite expensive and this saves the banks a lot of money in the end.
That is why it is important to shop around as much as possible when looking for a mortgage or refinance, becaue the rates will vary depending on who you choose to take tare of your mortgage or refinancing.
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