Money On The Back
I'm sure most of you know that an origination point on a mortgage is where most brokers make money, and it is.
But what many of you may not know is that we don't just make money 'on the front' (which would be the origination points)
but we can also make money 'on the back' which is called yield spread.
You may not be getting as good a deal as you think you are.
Brokers make money on the back when we charge a higher rate than what you actually qualify for. You may qualify
for a 4.875% but your broker may try to sell you at a 5.75% because the lender is paying him $3,000 to charge you a higher
rate. Why does the lender do this? Because that difference can mean anywhere from $30,000-$100,000 more for them
in the form of compound interest.
Ask for a copy of your rate lock.
Did you know that by law you are entitled to see the rate lock? A rate lock is a document that defines the terms
of the loan. It tells what kind of loan it is, the qualifying conditions, the rate they have locked the loan at AND
how much yield spread they're making on the back.
How to read the yield spread on a rate lock.
The yield spread is usually located at the bottom of the page. You'll want to look for the final price. It
will look something like 102.45 The 100 is 100% of the loan that goes to the customer to create the loan. Anything
over 100 is what the broker is getting. So in this case the broker would get 2.45% of the loan value. If the loan
is $275,000 than the broker would be making $6,737.50 (If the broker works for a company than a percentage of that would be
his commission). That money is on the back, money you don't see unless you ask to see the rate lock and the broker is
probably selling you .5%-1% higher than what you actually qualify for.
Let's say the $275,000 at 30 years fixed at 5.5% comes to a monthly payment of $1,561.42
Over 360 months you've made 562,111.11 worth of mortgage payments.
BUT
You're being charged .5% more than you actually qualify for. You're actually being charged 5.75% which is
a monthly payment of $1,648.76
Over 360 months you've made $593,555.02 worth of mortgage payments.
That's $31,443.91 thrown away to compound interest. Is it worth $4,000-$6,000 in closing costs to save over
$30,000 over the life of the loan? It is if you're planning to live in your home for a significant amount
of time (especially if the closing costs are rolled into the price of the loan).
So my point here is that just because you may not be paying any closing costs doesn't necessarily mean it's a good loan.
Most financial advisors say a good rule of thumb is to see if you can recover the closing costs within 4-5 years. And
of course, that you'll be living in the house more than 5 years down the road.
In Maine, you are legally entitled to request a copy of a rate lock. If a company will not send you a copy that's
a warning flag that they're trying to hide something from you.
