A mortgage broker shops loans from wholesale lenders for a commission. The mortgage broker gets more commission if he/she locks a rate with a client that is above the market rates. Sometimes a broker can double or triple their commission with fairly small rate increases. These rate increases are called a yield spread premium. On average a .25 percent rate increase can earn a broker another one percent of your loan amount. A lot of brokers mark up their loans up to .75% higher than the market rate! That will earn them a hefty bonus!
The most common way mortgage lenders get paid are from origination fees. Origination fees are charged by the individual who is processing your loan, whom is usually a mortgage broker. Origination fees are also called origination points and are pretty common. Usually “1 point” is charged, which means you will be charged 1% of your loan amount. Paying one point is normal and you should not fight that. If you are getting charged more than one point you should continue looking for another mortgage broker.
Another way a mortgage broker can get paid is to charge a “rate lock fee”. If you are getting charged this then I would recommend questioning the broker about it. Lenders do not charge a fee for locking in a rate. This is a red flag for dishonest brokers.
In my opinion the best mortgage brokers are those working in a small office or even out of their home and are self employed. These brokers do not have the high overhead that larger offices have and will most likely negotiate more on the fees involved. Let them know that you will not pay for a home loan with a yield spread premium and that you will only pay a 1% origination fee.
One other common topic that always comes up is the use of a bank or credit union instead of a mortgage broker. Most people think you can avoid all of these fees if you work directly with a bank or credit union. Banks do not charge a yield spread premium but they do charge their own fees and have their own markups. The bank markup is usually called a service release premium. The bank is not required to disclose thise markup information, EVER. You will never know about it. You will never get the same rate from a bank that you can from the right mortgage broker.
Be wary if you see “miscellaneous fees”, “packaging fees”, or “marketing fees”. Also, the majority of messenger fees are escrow/title trying to get you to pay for daily courier trips that will happen regardless. Try to waive these. Other fees to keep an eye on are your application fee, underwriting fee, loan processing fee and broker rebate. If any of these fees seem excessively high then you might want to ask about them.
In conclusion, you have the right to see the HUD-1 (closing statement) 24 hours before closing so ask for it and compare it to your good faith estimate. If the numbers are not close at all then definitely ask questions!