Over the years many homeowners in Las Vegas area have asked me about how mortgage lenders make money, so I took so time to explain the basics as it is not very clear to many first-time homebuyers or even seasoned homebuyers that have bought many homes or refinanced multiple times.
In the mortgage business there is money made on both the front and back side of a newly originated mortgage, whether a purchase or refinance. I will attempt to break this down into simple terms for everyone to understand all the nuances.
The front side of a loan is referred to as the origination fee and/or discount points, this would also encompass any junk fees that the lender charges. The origination and discount points are disclosed on the Good Faith Estimate (GFE) under “Your adjusted origination charge” and on the Settlement Statement (HUD-1) at closing under section 800 called “Items Payable in Connection with Loan.” All upfront fees associated with this mortgage should be on the GFE so be sure to get a copy, at the time of application, for your records.
The backside profit or yields spread premium (YSP) of the loan is never usually discussed with the homebuyer or homeowner as it is the amount of money that the lender makes when they sell the loan to a large lender, Fannie Mae, Freddie Mac, Wall Street or private investors based on the quality of the loan, terms and interest rate they sell you on. The reason I say sell you on is because if you are a homebuyer that just trusts everyone and didn’t shop around then they will usually charge you an extra .125% -.375% on your interest rate to make more on the backside (YSP) of your loan. This additional profit in their pocket of perhaps a $1,000 or more may be an extra $15-$40 a month added into your payment for 30 years on an average size mortgage.
Rate YSP Explanation
2.75% 1.340% You would pay 3.34% origination fees to get this rate
3.00% 0.000% You would pay 2% origination fees to get this rate
3.75% -2.048% You shouldn’t pay any origination fees
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