The first thing wrong with this transaction is that Jackie jumped at the first favorable offer she received. Jackie never questioned the figures Terry presented her and never noticed the prepayment penalty he slipped in the contract. Jackie never knew the 1.5 points she paid for the origination fee was highway robbery; considering Terry helped himself to an additional $10,650 commission at her expense. Because of the prepayment penalty Jackie is stuck with an above market interest rate on a bad mortgage and doesn’t even know it. How can you avoid Jackie’s mistakes? Read on…
The first thing you need to know in order to avoid a loan like Jackie’s is how mortgage brokers are compensated for their work. Your mortgage broker is paid in two ways. First, the broker receives the origination fee you pay for arranging the loan. In this example the broker charged Jackie 1.5 points, or 1.5% of the loan amount, for the origination fee. Remember that a point is the equivalent of one percent of your loan amount due at closing. A reasonable amount to pay for loan origination is 1 point, or one percent. This is the first area Jackie overpaid for her new mortgage.
The second way mortgage brokers are compensated for arranging your loan is the so called “Lender Paid” compensation. This is a fee paid by the lender as commission for the loan. Most homeowners think since the lender’s paying the fee and it’s not coming out of my pocket, why should I care how much the broker gets from the mortgage lender, right? Wrong! Consider why the lender pays your broker this fee…it is in fact an incentive for overcharging you on your mortgage interest rate.
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