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: