The answer is determined by who is originating/underwriting your mortgage loan...

Typically, prior to the 1980’s, local banking institutions originated and serviced their own mortgage loans. Those banks would hold the mortgage and collect the amortized principal and interest payments over the term of the loan. The interest charged by the bank was the profit they levied upon the consumer for the privilege of being issued a loan. This practice has not necessarily changed.  What has changed in today’s more complex mortgage market is who now reaps the profits from the borrower’s mortgage privilege.

 

In today’s mortgage market there are few banks that actually originate a mortgage loan and hold the contract for the entire term of the loan. A consumer may continue to make payments to the local bank that originated the mortgage, but the loan contract itself has been sold to a third party. This is known in the industry as selling Mortgage Papers into a Secondary Market, which allows local banks to recoup the capital they previously loaned out. A bank, being re-supplied with new capital, will  re-loan that money to another borrower and the process repeats itself. So if a bank sells the mortgage and the interest it would generate over the term of the loan, how does the originating bank or mortgage lender make money? The answer to that question is Service Release Premium (SRP) or for a mortgage broker Yield Spread Premium (YSP). Explanations for these premium imbursement programs follow….

Service Release Premium ( SRP) is paid to the bank or a mortgage lender for releasing to a secondary lender its right to earn the accumulating interest on a loan. For example: A local bank or mortgage lender who originates a 30 year fixed rate, $350,000 mortgage, with a compounding interest rate of 6%, would earn an astounding $405,434 in interest over the 30 year term of the mortgage. This figures to be over 115% above the original loan balance. It does not even include the repayment of the original $350,000 principal. The total amount of repayment, principal and interest would amount to $755,434.

 

Most small to medium mortgage lenders would quickly run out of money by tying up their capital for that many years. Therefore, they will sell of their rights to earn the $405,434 interest to another secondary lender that possesses the funds to hold the debt for the term of the loan. The smaller lender is compensated with the recovery of their original loan amount; plus the secondary buyer allots them a percentage of projected earnings. This is called Service Release Premium (SRP) and the percentage will typically range from 1% to 2% of the total loan amount.

 

But what happens when the bank or mortgage lender persuades a borrower that the same loan requires an interest rate of 6.5%, instead of an available 6% market rate? The loan amount of $350,000, at a rate of 6.5% for 30 years, would generate $446,406 in total interest. Just one-half of one percent of added interest amounts to a whopping $40,972 over the 30 year term of the loan. The accruing interest alone would be over 127.5% of the face amount of the original loan.  Again, this does not include the application of any payment toward the loan principal.

 

A larger secondary lender will readily reward a loan originating bank with another 1% to 2% of the loan amount for enticing a borrower to sign on the line to accept a higher interest rate. This is the reason lenders’ interest rates vary for exactly the same mortgage products. Each bank or lender sets the profit margin it expects to earn on mortgage products it sells. Interest rates are adjusted to meet their profit expectations. One lender may demand a 4% profit on the amount of a loan. Another may accept 2% on its sale of mortgage paper. The institution that expects the most profit will be the one with the higher interest rate. Remember that lenders are selling the same loans at different profit (interest) rates.  

 

Above that, an originating lender’s profit margin is escalated higher by the points and fees it assesses a borrower for just writing and processing a loan.  Points and Fees are up-front add on costs a lender requires a borrower to pay.  An added point is equal to 1% of the face amount of a loan. It is not unusual for an originating lender to affix 5% to 7% of a loan’s face value for points. Points at 6% of $350,000 would amount to an added $2100.00, plus any loan origination fees the lender chooses to levy.  Points and Fees must be paid at the time of closing. You can see why  it is so important for borrowers to shop mortgage companies. It is worthy of repeating that all companies sell exactly the same mortgage products. The single difference is the profit margin each lender requires for the products it sells.

SmartRateSearch.com provides the American consumer a proprietary Virtual Loan Shopper System that allows the borrower to view which lender is offering the lowest interest rates and fees for products they offer.

 

What are Mortgage Brokers and how are they compensated? Mortgage Brokers are non-affiliated middlemen who independently originate mortgage loans, which they sell to a number of larger, long term lenders. They may also sell Mortgage Paper to mid-size lenders, which they purchase for resale to larger institutions. Mid-size lenders are paid for their role with percentage earnings from the Service Release Premium (SRP). Mortgage brokers are compensated by way of a “Yield SpreadPremium.” To qualify they must originate a loan at or above the interest rates already established by purchasing institutions. These rates are provided to mortgage brokers and include the lender’s pre-set profit expectations. Consequently, mortgage brokers must originate loans at higher than established interest rates in order to earn profits on the loans. This is called “up-selling” and it is a standard practice in the brokerage industry. Lenders pay the brokers a Yield Spread Premium (YSP) percentage, based upon the additional interest they can up-sell or add to a borrower’s loan.  If borrowers have knowledge of the lenders who are actually funding loans, they can go directly to a lending source and save added third-party broker’ fees.

 

SmartRateSearch.com provides the consumer with the advertised terms of many of these national mortgage lenders and banks. Additionally we provide the consumer with the Best Overall Products our researchers have located for that day. Thus, a potential borrower has the opportunity to compare lenders’ offerings against each other, and/or against any offer they have received from a smaller local bank or lender.

 

Very simply, for the first time in lending history, SmartRateSearch.com provides the average mortgage borrower with the ability to easily compare any loan quote to those actually available to them in the marketplace. The consumer needs never again to allow the smoke and mirrors of the lending industry to deceive them into paying too much for a mortgage product that could be obtained for less.