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:
- Mortgage Refinance: Is Your Lender Legit?
- Mortgage Refinance: Which Lender?
- Mortgage Refinance: Tradeoff Between Rate and Closing Cost
- Mortgage Refinance: When to Lock?
- Mortgage Refinance: What If Rate Drops After You Lock?
- Mortgage Refinance: Before and After Closing
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T Nguyen says
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
Harry Sit says
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.
T Nguyen says
Thank you for your response.
T Nguyen says
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.
Harry Sit says
If you’d like you can cross out the title “borrower” and write in “borrower’s spouse.”
T Nguyen says
Thank you for the reply.
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?
Harry Sit says
@Audrey – The deed indicates ownership. Who own the house and who borrow money are separate issues.
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.
Harry Sit says
@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.
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.
Harry Sit says
@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?
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.
mike d says
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
I have been in the mortgage industry for my entire working life. I am 27 years old and have been in the business for just under 9 years. i have seen major changes in the business since i started in 2004. People wondering how much a mortgage lender or broker makes for a refinance really can’t get a clear cut answer. first, there are a few different types of mortgage companies you can work with. Due to the Dodd Frank act you are able to see every dollar that a broker brings in. typically they charge between 3 and 5 points (3-5% of the loan amount). you will also see a credit in many cases to offset the broker fee. This credit comes from giving you a higher rate than what is actually available, not from being generous enough to cover the majority of their fee. they still make the 3-5% that they are charging. if 4% interest rate is available without buying the rate down and it does not offer a yeild spread premium (the money that the lender “credits” to you to offset your broker fee) then 4% is the par rate. however, you will rarely get the par rate from a broker. if you do then your closing costs are going to be much higher because there is no money to credit back to you to offset the 3-5 points that they want to make on your loan. instead you will be offered a higher rate that pays a premium which is credited back to you. lenders pay premiums to brokers for originating loans at higher rates. They don’t offer this incentive becuase they make more money in interest on your monthly payment. they offer this incentive becuase fannie mae and freddie mac will purchase the loan from the lender for more money. to make it simple, fannie mae and freddie mac may pay 7 points to a lender for loans at a specified rate. the lender will set sort of a margin of lets say 3 points that they need to make on every loan. So, the lender in this scenario would pay 4 points to a broker for offering the rate that pays 7 when they sell it. the broker offers you a loan where they charge you 4 points and credit it back wth the premium that the lender pays for that rate. it looks like you pay no origination or broker fee but really the lender is crediting that money to you and the broker is charging you 4 pionts. they are a wash but if you have a credit on the good faith estimate then you are getting a rate that is higher than what is available. With mortgage banks that are set up as a correspondent it’s a little tougher to see what they are making. However, through managing over 60 mortgage bankers and checking profitability of each loan and talking with managment at other similar companies I know what the norm is. With most correspondent lenders you are likely going to see some type of origination fee that they tell you they have to charge on every loan. this is thier “processing” or “underwriting” fee. it typically varies from 800 or 900 bucks to 2000+. they may also charge “discount” points to you that they tell you they are charging for you to buy down your rate. However, usually the pricing that your banker sees is much different than what the lender actually gets. When a banker sees a rate that is “par” it is usually paying the company around 4 points. so if the rate actually only pays 3 points the banker believes that it is costing a point so they charge you that amount. lender credits from the lender are given in most cases because the banker sees that the rate they are offering is paying a premium. they may credit you back 1 point for example to cover some of your closing costs. however, that rate is likely paying 5 points. Furthermore, smart lenders will “hedge” loans. Basically they take out multi-million dollar blocks rom the lender they plan to sell to and promise to fill that block by a certain date. by doing this they can earn incentives of (from what i have seen) up to another .75%. so now the 4% that they are making from their “par” rate becomes 4.75% plus an underwriting and/or processing fee. the amount that they make quickly approaches 5 or 6 percent. brokers are mostly capped at 5%. direct sellers to fannie mae and freddie mac can make more than 5 or 6 points. either way, the institution that you choose will probably make no less than 3% and will likely shoot for something between 4 and 5 percent. so, a $200,000 loan is worth usually 8-9 thousand dollars. a smaller lender doing 200 loans per month averaging 200,000 loan amont will probably have a revenue of around 1.8 to 2 million. however, overhead is extremely high for mortgage companies (marketing, compliance, licensing, quality control, salaries, loan buybacks if they make a mistake in underwriting and can’t sell the loan, legal counsel to keep up with the constantly changing regulations on mortgage lending, and many more costs that i probably know nothing about). These companies need to bring in revenue like that. the fliers that you get in the mail are expensive. the rate of return is usually between .5% and 1%. that’s just to recieve a phonecall from an interested party. A decent originator who is lucky enough to have specialized mailer that are targeted to qualified borrowers is going to close (maybe) 10-12 percent of the prospects that call in. so 100,000 mailers becomes 1000 calls, that becomes 100 loans. 100,000 mailers are probably going to cost about 50 grand. this amount needs to be sent out weekly to generate 3 or 4 hundred loan closings. that’s a 200,000 monthly investment. if they only made $1000 per loan they would fail very quickly becuase they wouldn’t even be able to pay their employees. I have seen successful mortgage bankers make 400+ thousand per year. i have experienced first have $250k simply from managing bankers. i have seen unsuccessful mortgage bankers make 30,000 a year. it varies so much that it’s impossible to say that they are making too much for the work that they do. most of the people that i have worked with are good people who will turn away a prospect if there is no benefit to the consumer. however, it is normal for potential borrowers to be extremely defensive and almost insulting during the beginning stages… even when they call in for help! just dealing with that type of annoyance is worth a healthy commission. beyond that, bankers will spend more time than you know fighting to get the tough ones closed for their borrower. meanwhile they are being verbally abused by the borrower for taking to long. managing that is stressful as well. It’s an extremely stressful business and the more borrowers you are dealing with the more stressful it is. but the more money you make too. if you want to refinance, the cheaper place will usually be the place that didn’t send you a flier in the mail. it will be the place that sits and makes cold calls off of a list because they avoided the cost of sending out several thousand mailers. so, be open to the hard working cold calling banker. if they have a commercial during the super bowl you can be pretty sure that they aren’t the cheapest. also, go into the process understanding that across the board, everybody is making 3-5% on your loan. the best way to shop is to contact a few places to get an idea of the rate and closing cost range that you are looking at, then DONT ALWAYS GO WITH THE BEST RATE OR COST! go with the person who seemed to be the most honest and gave you the feeling that they could get it done. Somebody who is straighforward, patient, and knowledgable. that person will make it painless. the slightly higher rate or cost will likely only cost you 7 or 8 bucks a month. also, the good banker will probably be able to get close to your best offer if the best offer is actually a viable option. Pick who you want to work with… not the person who saves you an extra few bucks a month. and remember, they are going to make 3-5% and theres nothing any consumer can do about it. it’s a mark up that is standard across the industry. think about it like furniture. your 2,000 couch was market up 1000%. they aren’t doing charity work but they are helping you to meet your financial goals.