The Barrington Financial Group, Inc.

Question 6. What determines what your lender charges you on points?

Answer:

For a discussion of points, see Question 4 above.  A lender has guidelines on how many points he can charge.  Lenders are allowed to receive up to a total of 5 points for their work in getting you the loan.  In most cases, the loan officer handling the loan will charge one (1) point for an origination fee when the applicant has good to excellent credit.  Anything over 1 point is considered high.  Unless it is an unusually difficult case, most loan officers only charge between 1 and 2 points for the origination fee.  So, always look for a lender where you are only paying a maximum of 1 point or less.

Points can also be charged when the consumer is allowed by to "buy down" the interest rate. (See discussion in Question 4 above.)  The amount of the fee can vary from lender to lender.  To lower the rate 1/2 point, could possibly cost 1 point up front.

Another way a borrower pays "points" to a lender is indirectly through the interest rate.  Most consumers are not aware of this.  When your loan officer quotes you an interest rate, it is very rarely their "par" rate."  Par is the lowest rate that the lender offers and means no commission for the broker other than the origination fee.  The higher the interest rate you are given, over "par," the more money the loan officer makes in the form yield spread.  See Question 3 above for more information on yield spread.  Loan officers make their money in basically two ways. Origination fees and yield spread.

It is important to know that all mortgage brokers (that are not direct lenders) must disclose to you the yield spread on the HUD 1 Form at closing.  However, if you are doing business directly with the lending source, they are NOT required to disclose this information.  Some mortgage companies are set up as Lenders.  This means that they actually fund your loan.  However, they have agreements with other lenders to purchase the loan at closing.  The mortgage company in turn makes another fee from the major lender for selling the portfolio of loans to them.  Why do they do this? There are two main reasons. First, it allows them to close a larger number of loans more quickly.  However, another big reason they are set up this way is to avoid having to disclose the yield spread to the customer.  Many consumers would walk away from the loan if they knew their loan officer was not giving them the very best rate available.

I know several loan officers who, because they want to beat the competition, make their money off origination fees only.  So they put their customer into the "par" rate loan.  This is not common.  

Some loans are very difficult to get approved, so don't be upset by your loan officer putting you into an interest rate above their "par" rate.  Believe me; a good loan officer is worth their weight in gold.  Putting you into a good loan that fits your needs enables you to save thousands, if not tens of thousands of dollars over the life of your loan.  So, the extra money from the "yield spread" for time and efforts spent up front is well worth it.

A reputable, ethical loan officer takes good care of their customer.  They want you to come back in the future.  Not giving you a good deal or the best deal available, costs them future business from any referrals you may have.  Since loan officers get a great deal of their business from referrals they usually try to put you into the best deal they have to offer.