Choosing the wrong loan originator to arrange your next home loan could be a costly mistake. The fees you pay including the loan origination fee make or break the deal you’re getting for your home. What is a loan originator and what fees will I pay for their part in arranging my home loan? Here’s what you need to know to avoid overpaying the loan originator and get the best deal on your next mortgage.
What Is a Loan Originator?
Simply put, a loan originator is the person or company arranging your home loan. Traditionally, mortgage loans have been sold as retail products so companies and brokers “resell” loans from wholesale lenders. In the aftermath of the housing meltdown many people are shying away from mortgage brokers and choosing so-called “direct lender” for purchase and mortgage refinancing loans.
Don’t confuse “direct lender” with wholesale lender, they’re far from the same. Wholesale mortgage lenders still exist; however, they don’t offer home loans to the public. These wholesale outlets exist for the pool of mortgage brokers “reselling” home loans to the public. Most wholesale lenders have retail divisions so don’t think that contacting one directly will get you wholesale mortgage rates.
How do Loan Originators Get Paid?
The person arranging your loan gets paid (rightly so) from one of two sources. Loan originators can accept lender paid compensation when you agree to a higher than market interest rate or they can charge you a mortgage origination fee for their services. The markup of your mortgage rates for the broker fee is called Yield Spread Premium.
Many people incorrectly think Yield Spread Premium (YSP) was outlawed; however, the only thing that changed is your broker can no longer accept both Yield Spread Premium AND an origination fee as compensation. Yield Spread Premium is alive and well.
What is Yield Spread Premium
The way YSP works is in exchange for accepting a higher than market mortgage rate the lender pays your origination fee and often closing costs. This is how those no fee refinance offers you see work. For every .25% that you accept higher interest rates the lender pays one percent of your mortgage amount towards the origination fee and closing costs. Some lenders like NFCU Mortgage Rates offer Yield Spread Premium as an option outright for paying your loan origination fee.
How Much Should You Pay?
The person or company arranging your home loan deserves to get paid. (If you go that route) I’ve seen community based credit unions offer home loans with ridiculously low origination fees as little as $300. If you’re paying a mortgage broker fee a reasonable amount is one percent of your loan amount; however, you can do better. (A lot better)
Should you accept Yield Spread Premium to pay your origination fee and closing costs? The problem with taking higher mortgage rates is that this will drive your payment up. If you’re refinancing taking higher mortgage rates reduces the benefit you’re getting and lengthens the amount of time it’s going to take you to recoup any out-of-pocket expenses. Mortgage rates are at historically low levels so paying discount points is another cost you’ll want to avoid if possible.
I’ve spent a fair amount of time reviewing lenders on this site and the best deals I’ve found as far as fees have come from the smaller community-based credit unions. Spend a little time shopping for both mortgage rates AND fees and you can save yourself thousands of dollars that your neighbors overpaid.
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You can learn more about getting the best deal for your next home loan while avoiding lender junk fees and unnecessary discount points by checking out my free Underground Mortgage Videos.
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