The Barrington Financial Group, Inc.

Question 3. Why do some lenders offer a better interest rate than others?

Answer:

A broker is not necessarily the lender that actually loans you the money. A broker is in the business to put the entire transaction together. A broker finds the best lender to meet your needs based on your personal financial situation. It is their job to find the client the best deal (loan) available in the market at that time. However, they do not work for free. So, we must understand how they make their money. Firstly, from an "origination fee," and secondly, off of the interest rate. Let?s take an example. We have a $100,000.00 loan. The broker decides how much of an origination fee to charge. A broker normally charges around 1% of the loan as an origination fee to a consumer with good to average credit. For consumers with credit problems with the broker must spend more time in processing the loan. When more time is required on the loan, the broker usually charges a higher origination fee. It could be as little as 1/8 of a point (see question 4 below for a discussion on points) higher, or it could be several points. It is completely up to that broker how much he wants to charge for the origination fee, as long as he is within banking and mortgage industry regulations. There are caps on how much a broker/lender can charge for a loan. This issue will be covered in more detail later.

The second way a lender makes money is on the interest rate. Lets again use our example of the $100.000.00 loan. We assume, for our example, that the consumer has good credit. You go to broker A, who quotes you an interest rate of 6% on a 30 year fixed rate loan with a 1 point origination fee. However, you want to see if you can get a better rate, so you go to broker B. Broker B quotes you an interest rate of 6.5% with 1 point origination fee. You then go to broker C, and he quotes you an interest rate of 5.75%, with 1-point origination fee. How do you know which broker is really giving you the very best deal?

This is a part of the industry that most loan officers, brokers, and lenders do not want you to know. It is called "yield spread." Without over complicating the issue, let?s try to understand this. Lenders provide brokers with a "rate sheet", usually on a daily basis, to enable the broker to know how to "price your loan." This sheet contains information called the "par" interest rate. In our example, let?s assume par is 5.75%. This means that on a 5.75% interest rate broker C is not going to make anything on the interest rate. Broker A quoted you 6%, or ¼ of a point over par, and broker B quoted you 6.5%, ¾ of a point over par. By giving you an interest rate over par, the broker has enabled the lender to pay out another fee on what?s called the "back end" of the loan. The consumer rarely knows about this fee until much later in the qualification process because it is normally disclosed at the closing table, but in some cases it is never disclosed. We will discuss this later.