Mortgage broker commissions: To pay or not to pay?

Mortgage brokers are in sales, and like many salespeople, they work on commission. Broker commission rates are neither cheap nor exorbitant compared with other commission-compensated sales. What's most typical is one percent of the loan amount.

Fortunately, the charges of a mortgage broker are easy enough to evaluate if you're armed with some knowledge of the market. What rates are being charged by his competitors, the banks? (The calculation must include all fees and costs as outlined in "What to do: Mortgage Basics.")

Armed with that knowledge gleaned from ads and lender web sites, the next question is very much like considering whether to pay "points" on a mortgage. Do the resulting rates and terms justify the extra one percent tacked onto your beginning loan balance?

The decision is akin to deciding whether to pay discount points to buy down your interest rate. You must consider the added cost just as you'd evaluate any investment. What will be its monthly "return," and how many months will it take to pay off? That part of the calculation is precise, using a mortgage calculator such as the one on Trulia.

Beyond that, the evaluation takes some degree of judgment. For example, the value of an eight percent annualized return depends on where you think interest rates in general are going, and no one really knows.

A nimble broker should be amenable to removing a commission charge in exchange for a higher interest rate—just as doing so may negotiate away the assessment of points. In such a case, the broker still gets paid—by his client, the lender, in the form of a payment you'll never see. So again the question is, what is the point? (This too is best answered with the aid of an online mortgage calculator.)

To cut out the middleman and avoid commissions, you can indeed borrow directly from a bank. Major lenders have professional salespeople who will smooth the way to the closing. But being wed to one bank clearly limits their ability to compete on "price" (i.e., rates, points, and fee structures). On the other hand, mortgage lending is so competitive that a customer armed with a written offer from elsewhere can probably drive a bargain as if dealing with an independent broker. Don't forget the oldest and most valuable technique in any negotiation. When necessary, walk away.

For the truly determined, a more exotic approach to commission avoidance comes from the real estate investor community. Borrow from a hard money lender and there will be no commission, just high interest rates and plenty of points; plus the threat of losing the property and still owing the money. The approach may make sense for some people who think they'll qualify for a conventional FHA-backed refi in, say, 90 days, but are determined to own the property today.

Comments

By Robin Silverberg,  Mon Nov 30 2009, 04:53

This article is full of a lot of wrong information. Any bank has loan officers too, and they earn commissions as well. There is a certain spread between their par rate and the rate they want the loan officer to sell at, that is similar to what a mortgage broker gets in YSP. What a borrower has to be careful about is whether their mortgage broker is tacking on a 1% origination fee on top of the YSP they will be getting from the lender. Within the next couple of months, a new form of Good Faith Estimate will have to be used which makes the YSP (yield spread premium) transparent, so you know if a broker is making a YSP plus an origination fee. However remember, a mortgage bank does not have to disclose the amount that is actually similar to a YSP, and it does not get factored in to the APR either.

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By Bruce Bills,  Tue Dec 1 2009, 09:21

The key to solving this dilemna with mortgage brokers or any loan officer for that matter is loan transaction transparency. The meddling government has made an attempt to help with transparency for the consumer with the new GFE effective January 1, 2010, but as with most economic problems, if the government would stay out of the way, private industry, quick thinkers, capitalists, and other Americans will come up with the answer(s), In 2007, a totally transparent mortgage pricing tool was developed and presented on the internet. It is called RateWindow and shows the borrower exactly what the loan officer sees when it comes to rates, payments and YSP. RateWindow requires the loan officer to charge a predetermined fee that is disclosed to the borrower up front, and then allows the YSP to be used by the borrower to offset closing costs, just like the new GFE is requiring next month. To see RateWindow go to http://www.ratewindow.com. This is just another great example of why the government should stay out of the way and let the marketplace fix the problems. The marketplace is always up to the challenge.

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By John Burke,  Thu Jan 7 2010, 14:01

Wow, please do some research before posting misinformation! It's no wonder people are so confused. Retail banks are almost always going to have higher costs/fees as is the case with any retail vs wholesale transaction. In addition while brokers are required to disclose yield spread premium the banks are not and they often make more than the broker does!

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By Voices Member,  Tue Jan 12 2010, 00:41

This article is full of a lot of wrong information.

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By Short Sale Specialist - Foreclosure Real Estate Expert,  Wed Jan 13 2010, 17:29

I'm not even a mortgage broker, and didn't waste my time reading this. The first sentence is incorrect

Mike Linkenauger
Short Sale Specialist Network
http://www.short-sale-specialists.com

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By Paul Barnett,  Wed May 5 2010, 11:32

As a mortgage broker for 10+ years, I can honestly say that a good mortgage broker should act as a consultant and expert, not some used car like salesman trying to coerse you into buying a mortgage you don't need. Whoever wrote this article is off the mark in many areas...

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By Joanna Jensen,  Fri May 7 2010, 20:32

Hi All, info from the Wife of a Loan Officer who know a little but definately more than the average shopper.
when a client thinks they are getting a no point no fee loan they may be in for a big surprise. what most likely is happening is that client who didnt want to pay the unfront Point, may then be paying a higher interest rate for the entire term of the loan. So instead of getting 5.125 they are now getting 6% or more. when calculating the difference you may prefer to pay the point up front and get the lower interest.

I know brokers do charge a high Yield Spread premium. Most of the time the shopper has no idea. You want to also look at the APR in addition to the interest rate.

Also, some banks such as Bank of America take forever to close their loans. Things Ihear from my husband as a banker/broker he can get any type of loan and has ability to close very quicly. go to bank of america and see if they can close in two weeks, doubt it.

JoAnna Jensen
Realtor
Home Retention Consultant
Pleasanton
925 699 5041
Loan Mods, Short Refinance, Secured Short Sale

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By Charles Dailey,  Sun May 30 2010, 19:40

This article should come down. It's full of inaccuracies which, in sum, are a disservice to the public.

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By Sarah,  Wed Jun 30 2010, 23:19

It's not helpful for you to state that this article is full of inaccuracies, wrong information or is flat out incorrect. Please provide supporting information to also back up your statements.

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By Dennis Arner,  Tue Jul 6 2010, 04:19

That this article is full of inaccuracies is no surprise. Children are now allowed to be journalists and post their babbling without supervision. One sees this everywhere. They don't even need to spell correctly or use proper grammar!

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By Dennis Arner,  Tue Jul 6 2010, 04:19

That this article is full of inaccuracies is no surprise. Children are now allowed to be journalists and post their babbling without supervision. One sees this everywhere. They don't even need to spell correctly or use proper grammar!

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By AV,  Fri Jul 30 2010, 12:16

wow, I am dumber for reading this article? what 4th grader wrote it?

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By Michael,  Thu Sep 16 2010, 23:39

That this article is full of inaccuracies is no surprise. Children are now allowed to be journalists and post their babbling without supervision. One sees this everywhere. They don't even need to spell correctly or use proper grammar!
Michael
Best Loan Rates

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By Michael,  Thu Sep 16 2010, 23:43

That this article is full of inaccuracies is no surprise. Children are now allowed to be journalists and post their babbling without supervision. One sees this everywhere. They don't even need to spell correctly or use proper grammar!
Michael
[url=http://www.http://www.bestloanratesnow.com.com] http://www.bestloanratesnow.com[/url]

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By Jeff Nunley, CMPS,  Wed Sep 29 2010, 10:51

"To cut out the middleman and avoid commissions, you can indeed borrow directly from a bank" Huh? Every loan officer I know who works for a bank works on a commission. This statement implies that it is more expensive to pay for a mortgage broker's services and is very, very misleading.

The reason why mortgage brokers and coorespondents exist is that they offer more options than just one bank and do while reducing the cost to the borrower. To imply anything else is a dis-service to any borrower who believes this information. It is false statements like these that have led to the successful passage of the Merkley amendment and other new federal guidelines that are implicitly designed to harm the mortgage broker.

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By Maryosawa,  Wed Oct 13 2010, 03:04

Since when are mortgage brokers not in sales? Just like insurance brokers? They do make money on the deals they broker right?

Mary Osawa
http://www.manilaestates.com/

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By Mortgage Marketing,  Fri Oct 29 2010, 15:23

Mortgage brokers are sales people who earn money for every loan they sell. Even if you go through a bank you will still be paying the broker a commission - that's how they get paid.
http://mortgagemarketingcourse.com

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By T621,  Tue Feb 15 2011, 14:32

I don't know who's right or who's wrong, but being in customer service, I HATE SALES PEOPLE!!!!!!! I hate them in MY company and every other type of business!!! It appears that everyone who has replied is mortgage monger of some sort OF COURSE you're going to defend your own business! I'm willing to bet, the Trulia journalist who wrote this article had nothing to gain from lying unlike sales people!

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By Cheatmeifyoucan,  Thu Feb 17 2011, 02:02

Customers in US are paying 10-15 times for the same " Made in China" stuff with compare to other countries, due to cost of sales. Sales people use every legal/ illegal way of restricting the information to a customer, with incomplete information customer makes mistakes and gets ripped off- this is my opinion

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By Caroline Roy,  Tue Mar 29 2011, 12:37

FOr those of you that think all Sales people are created equal...there is no advantage to go to a bank vs. a broker. Brokers work with Wholesale lenders and Banks are retail. They both charge fees to originate a loan. FInd the person who you feel most comfortable with and who has the program that meets your needs. If you are anything but a 800FICO with 20% down, a broker will likely have better programs to offer. And banks do not always have the best rates either since they can only offer a few basic loans that they do best.

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By Neal,  Fri Apr 8 2011, 00:51

Hey, The mortgage brokers work on commission, which are paid by you, by the lender, or by both you and the lender. If you work with a mortgage broker, the industry norm is for them to charge you an origination fee equal to 1 percent of the loan amount.

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By Courtney Hansen,  Fri Jun 10 2011, 13:32

this is a great article! Thanks for posting.

Courtney H.
http://www.oneclickcommissions.com/commission-broker.html

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By Liann,  Thu May 17 2012, 19:38

This is a very good job, but I want to change their lives every time the answer to the mind, blog.I blog as well as two other attempts with me, doing what services . I'm looking for a love to have a fresh and unique work.

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By Liann,  Thu May 17 2012, 19:43

This is a very good job, but I want to change their lives every time the answer to the mind, blog.I blog as well as two other attempts with me, doing what services . I'm looking for a love to have a fresh and unique work.

• report