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 "How do mortgage brokers set pricing?"
The fact that the lender is paying the broker a commission does not mean that you are paying a higher rate. In fact, many brokers can save you money by shopping for your loan. The rate offered to you by mortgage brokers is a function of the rates offered to them by their wholesale lenders and their markup.
When deciding on a mortgage broker it is important to choose one that shops rates with a large number of lenders, has a fair markup and good service. The loan professional that has made this information available to you specializes in assisting those individuals with obtaining a home loan whether for purchase or refinance. Your loan professional in most cases can advice you on the best approach and help you with your specific loan requirements.
The truth is, mortgage brokers obtain rates at wholesale, mark up these rates by adding points and then quote you a retail rate. It's that simple! This is similar to what a travel agent does. Travel agents obtain discount pricing as a result of their volume.
Example 1 : 1.0 point price. Wholesale rate 8% for 1.0 point; Retail rate 8% for 2.0 points. Mortgage Broker would earn 1.0 point.
Example 2 : 0 point pricing. Wholesale rate 8% for -1.0 point (rebate pricing*); Retail rate 8% for 0 points. Mortgage Broker would earn 1.0 point.
*Rebate pricing is where the lender pays the broker a fee, (i.e. on a 1 point rebate or -1 point fee, the lender would pay the broker a fee of 1 point).
Example 3 : 0 point/reduced fee pricing. Wholesale rate 8% for -2.0 (rebate pricing*); Retail rates 8% for -1.0 point. Mortgage Broker would earn 1.0 point and consumer would get a rebate towards closing costs of 1.0 point.
A mortgage broker's wholesale rate sheet might look like: -3 at 8.5%; -2 at 8.25%; -1 at 8%; 0 Par Pricing at 7.75%; 1 at 7.5%; 2 at 7.25%. Here, mortgage brokers earns 3 points if they sell the loan at 8.5%, 2 points if they sell the loan to you at 8.25% and 1 point if they sell the loan at 8%. These points are paid by the lender and may be known as Premium Pricing, Service Release Premiums, or Rebate Pricing. These points are not charged to you the borrower, but you do pay the higher rate. At 7.75% the broker does not get any points back from the lender––this is known as a par price. The broker has to charge you points to make money. At 7.5% the broker has to pay 1 point to the lender and will pass this on to you as well as charge you extra points to make a profit. In this case, the lender's points are known as a discount fee and the broker's points are known as an origination fee. It is important to understand that brokers do get a wholesale rate and are providing a valuable service and deserve to get compensated.
At CC&B Solutions, we prefer to be open and upfront with our clients regarding how we get paid, while striving to ensure that the value of our services to you far exceed the costs.
Wisdom is the principal thing: Therefore get wisdom. And in all your getting, get understanding.
Proverbs 4:7
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