How Much Money Does a Bank or Broker Make From a Mortgage Refinance?

By Harry Sit

Have you wondered how much money a bank or a mortgage broker makes when you do a mortgage refinance with them?

By law, a mortgage broker must disclose their compensation but you often don’t see it until you get the final closing statement ("HUD-1"). In a post last year, Mortgage Broker vs Mortgage Lender, I showed a mortgage broker I worked with made $3,371 from doing a refi for me in 2008.

That broker wasn’t particularly expensive. Although I didn’t know as much about mortgage refinance as I do now, I remember his rate was the best I could find at that time.

A bank or credit union isn’t obligated to tell you how much it makes from doing your refinance. You can still get a clue as to how much it makes.

Mortgage company AmeriSave has a deal with the Mortgage Professor Jack Guttentag. If you go through a referral link on the Mortgage Professor’s website, AmeriSave promises to pass on the true wholesale rate plus a fixed markup for itself.

Using a $200,000 loan in Barton County Missouri as an example (I just picked a random place), I see AmeriSave offers a 30-year fixed loan at 4.25% with a $1,000 all-in closing cost excluding prepaid interest and escrow deposits. AmeriSave discloses that it will make $3,300 from this loan.

For comparison I picked a random bank in Missouri that offers detailed mortgage quotes online: Commerce Bank. For the same $200,000 loan at the same 4.25% 30-year fixed rate, Commerce Bank wants $4,500 in all-in closing cost excluding prepaid items.

That’s $3,500 more than what AmeriSave charges. If AmeriSave will make $3,300 from doing the refi, Commerce Bank will make $3,300 + $3,500 = $6,800. Eventually the loan will end up going to same place: Fannie Mae or Freddie Mac.

Making $3,300 versus making $6,800 is a big difference, isn’t it? I’m sure Commerce Bank isn’t the most expensive because I just picked it randomly.

This exercise shows there are huge variations in mortgage refinance offers and in how much the bank or broker makes from your refinance. The mortgage refinance market isn’t close to being an efficient market. It pays to shop vigorously. You can’t just pop into a random bank or just go with a broker your co-worker recommends. If you don’t know where the good deals are, you will be paying thousands of dollars more than you should.

Even for a lower cost lender like AmeriSave, making $3,300 from doing a refinance is plenty already. How often do you let someone make $3,300 in one shot? When you buy a new car, the dealership doesn’t make $3,300. How much time do you spend on shopping for a car?

Mortgage refinance is a serious business. The bank or broker will make a tidy sum of money from your business. You owe it to yourself to get the best deal and service.

This is part of a "How to Refinance" series of posts. Other posts in the series include:

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Software picked, likely related posts:

Posted on September 15, 2010 under Mortgage and Loans. Keywords: .

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Comments

14 Comments on How Much Money Does a Bank or Broker Make From a Mortgage Refinance?

  1. T Nguyen on October 25, 2010
     

    Dear Sir/Madam,

    My wife and I recently refinance with an online Mortgage company. My wife’s and my name is on the Deed with our original mortgage loan. When we refinanced only my wife’s name is on the new mortgage loan. I assumed that my name should not appear on settlement papers. However, my name appears along with my wife on these following forms that require my signatures. I am confused. Please let me know if the mortgage company is right. If the mortgage is right then which papers/forms that I should not sign. Forms that require my wife’s and my signature:

    1. Closing Agreement
    2. Compliance Agreement
    3. Affidavit And Indemnity Agreement As To Leases, Contracts, Fixtures, Encumbrances, And Mechanic Liens, Etc.
    4. Affidavit For Survey Coverage Under Covered Risk 2(C) Of The 2006 Alta Loan Policy (One To Four Family Dwelling)
    5. Notice Of Availability Of Owner’s Title Insurance
    6. Closing Notice To Borrower
    7. Instructions To Settlement Agent Regarding Disbursement Of Proceeds
    8. Affidavit To Be Signed By Seller And/Or Mortgagor In Connection With Title Insurance Policy To Be Issued By Fidelity National Title Insurance Company Company For Residential Mortgage Purposes Only
    9. Identity Affidavit To Be Completed By The Borrower
    10. Mortgage/Line Of Credit Termination Affidavit
    11. Mdia Acknowledgment And Fee Disclosure
    12. Virginia–Single Family–Fannie Mae/Freddie Mac Uniform Instrument (Form 3047 1/01)
    13. Planned Unit Development Rider
    14. Federal Truth-In-Lending Disclosure Statemen T (This Is Neither A Contract Nor A Commitment To Lend)
    15. Itemization Of Amount Financed
    16. Addendum To Itemization Of Amount Financed Additional Charges
    17. Payoff Schedule
    18. Notice Of Right To Cancel
    19. Occupancy And Financial Status Affidavit
    20. Hazard Insurance Disclosure
    21. Non-Applicant Affidavit

    Thank you.

    T Nguyen

  2. TFB on October 25, 2010
     

    T Nguyen – In order to make your wife the only person responsible for the loan, you can sign every other document except the promissory note. As long as you don’t sign the promissory note, you are not obligated to pay. You still sign the other documents because you have an ownership interest in the home and the entire home is used as collateral for the loan – the lender can’t foreclose only half of a home.

  3. T Nguyen on October 26, 2010
     

    Thank you for your response.

  4. T Nguyen on October 26, 2010
     

    I have another question concerning the refinance:

    I noticed that the Form “Occupancy and Financial Status Affidavit” requires both my wife’s and my signature as Borrowers. Since my wife is a sole borrower for the refinance loan. I should not have to sign the Form as the Borrower.

    Thank you.

  5. TFB on October 27, 2010
     

    If you’d like you can cross out the title “borrower” and write in “borrower’s spouse.”

  6. T Nguyen on October 28, 2010
     

    Thank you for the reply.

  7. Audrey on December 23, 2010
     

    Regarding the above questions and replies, if the sole borrower’s spouce is not a co-borrower on the loan, why is his/her name on the deed to begin with?

  8. TFB on December 23, 2010
     

    @Audrey – The deed indicates ownership. Who own the house and who borrow money are separate issues.

  9. mtgbnkr on March 15, 2011
     

    Your assumption on profits is misleading because not all lenders have access to the same pricing. If they are a correspondent lender meaning they fund and close the loan and then sell it. Who they sell it to and their price dictates the profit margin no their price difference vs. another lender. Volume pass through and geography can all effect pricing.

    For larger correspondent who bulk and sell loans it can also be a factor of how effective their hedging strategies are and when they deliver the loans. All can have huge impacts on profit margin.

    However none of these issues effect whether it is the best deal just wanted to explain how a bank could cost $x more but not making $x more.

  10. TFB on March 15, 2011
     

    @mtgbnkr – Thank you for the insights. Too bad for those banks that charge more but yet can’t make more. For the borrowers, if they find a bank that charges less but makes the same or more profit, it’ll be a win-win.

  11. Lisa on April 8, 2011
     

    I found this post because I am wondering how much a mortgage costs the financier to maintain.

    I am currently negotiating my mortgage with my credit union. I felt bad about asking for 40k principal forgiveness until I realized that I’ve paid more than that in interest in just 5 years. That doesn’t even count the closing costs paid to get the loan in the first place, as discussed in this post.

    Perhaps not directly related, but your reply would be appreciated.

  12. TFB on April 8, 2011
     

    @Lisa – It costs the credit union the same as the interest you paid. A credit union is owned by members and operated on a not-for-profit basis. Suppose there’s an all-members meeting and you are presenting to them. How will you tell the other members that they should pay $40k to you?

  13. Lisa on April 8, 2011
     

    I know that they say they’re not-for-profit, but I paid more than $40k during the last 5years in interest. How is that no profit?

    I guess it must be used to pay for bad loans, operating expenses, etc. I know one thing: they won’t have as much in the future. I, for one, will never have a mortgage like that again and I’m sure I’m not the only one learning this lesson.

    Thanks for your reply.

  14. mike d on January 10, 2013
     

    I’ve been looking into a new career and i’m looking at mortgage lending. I’m 52, and have a degree in accounting so numbers do not scare me. For the past 25 years I’ve been in industrial sales (valves,etc.)

    How would I approach a local mortgage banker for a possible new sales candidate position ? IE: A company like Cornerstone Financial in St Louis

    Thank You

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