On average, a mortgage broker will get paid somewhere between 1% and 2% of the total value of the loan, which can obviously be a substantial sum. Brokers collect their income in a variety of different ways, and some of the most common fees are listed below:
- Loan origination fees – The most common cost of doing business with a broker, a loan origination fee usually costs a percentage of the total value of the loan. The larger your loan, the lower the percentage charged; for borrowers with a very small loan, their fee could be as high as several percentage points.
- Upfront fees – The second most common type of cost, upfront fees are usually an option for borrowers in the market for a more expensive home. Most upfront fees will be a flat cost for service arrangement.If your broker does not charge upfront fees, you should make sure you are not being charged a higher-than-market interest rate.
- Loan administration fees – Some mortgage companies choose to load extra “administrative” costs and charges on top of their loans. While some might argue these fees are necessary, you can probably get them removed if you have lending options outside of a mortgage broker.
- Yield-spread premium – A yield-spread premium is a type of bonus payment given to a mortgage broker by a lender in exchange for getting a borrower to accept a higher interest rate than is available on the market. Any borrower choosing to deal with a broker should rigorously check the mortgage markets to make sure their broker is giving them the best deal available. In most cases, it’s literally in the broker’s best interest to overcharge you on interest rates.
If you do choose to use a broker, you should be direct and ask what types of fees your broker charges. A trustworthy broker will usually be forthcoming, letting a borrower know just how much they will make off of a loan. Less scrupulous brokers might jack up a borrower’s interest rate and load the loan with extra fees. As with any product shopping around among different brokers is your best protection.
When pricing a mortgage broker, a borrower will generally have to choose between paying higher upfront costs or paying a higher interest rate over the life of their loan. The decision for most borrowers will come down to how long they expect to maintain their loan. If they are expecting to keep a loan for its full course, then paying more upfront for a lower interest rate might make sense. If they expect to refinance, then lower upfront fees might make better sense, so that they won’t have wasted thousands of dollars paying for a loan that lasts only a few years.
The ultimate question you have to ask yourself is if a broker is really worth the cost. And while that’s a question you’ll have to answer yourself, people often use them if they:
- Are self-employed and will have a difficult time proving your income
- Have less-than-perfect credit and might be rejected by traditional lenders
- Do not want to go through the hassle of dealing with lenders yourself
- Want to choose from a large list of possible loans and interest rates.
If you need a little bit more information about mortgage brokers you might read ‘Why Use a Mortgage Broker’, but in the end you’ll have to make the decision yourself.
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