Mortgage brokers have become a vehicle for wholesale lenders to shave costs in an evolving marketplace. The cost of operating an office including rent, utilities, office equipment & supplies, marketing, insurance, postage and salaries & benefits are borne by the Mortgage Broker. Because the lender is not forced to take on this additional expense, they pass the savings on to us in the form of Service Release Premiums. This is money the lender pays out for the right to procure the servicing of the loan (collection of the payments after the loan closes).  

There are really three distinct ways that mortgage brokers may be compensated:

1. The lender agrees to pay us a rebate based on the interest rate that you are charged. (This is called Yield Spread Premium).
2. You agree to pay to pay us directly in the form of a broker fee, often referred to as an loan origination fee. This is frequently quoted at 1% of the loan amount and will generally get you a ¼% reduction in your rate.
3. A combination of an origination fee and yield spread premium.

So in a nutshell, you can pay us, the lender can pay us or we can be paid by a combination of both. Which one of these options you choose is up to you, except in cases where a lender refuses to waive the origination fee, but that is rare.

Here are a couple very general rules of thumb:

1. If you are planning on staying less than 3 years, it rarely makes sense to pay an origination fee.
2. If you have a loan that is over $250,000 and you beleive that rates may drop in the future, it may not make sense to pay closing costs at all. See No Closing Costs
3. Paying a 1% origination fee will earn you a ¼ % lower interest rate.
4. Small mortgages, let’s say less than $125,000 will often carry a slightly higher rate. Lenders price larger mortgages more competitively and brokers generally have a target compensation in mind. Because they are paid based on a percentage of the loan amount, it will require a higher rate to acheive their target yield spread premium or total compensation.

How to compare lenders

When considering your options you need to make some assumptions and then do some number crunching. Most importantly, you need to make an educated guess about how long you may keep this mortgage. Just because you choose a 30 year fixed rate, doesn’t mean you will have the loan that long. As a matter of fact the average length of time that an individual holds a loan is less than 5 years!! You then want to compare the total cost of the loan over the period of time that you and your loan officer determine is reasonable (total cost is the closing costs plus the interest that you pay over the period of time selected). We have a software program that allows us to make this comparison very quickly. Then you make a selection. Click here to request this quick comparison...click here for a PDF

The Law Office of Kenneth R. Luther
Formed in 2000, the firm limits its practice to residential real estate closings. The firm was founded on the principle to partner with others that share in the desire to provide the best service at the best price while maintaining high standards of personal and ethical conduct that constantly reflect adherence to the “golden rule.” By following this principle the firm has grown from one employee to over twenty and continues to grow at a rapid pace.

Check their pricing and save about $500 to $1000 on your next closing.