How Mortgage Lenders Make Money (and Borrowers Pay for It)

Some borrowers still believe "no fee" loans really do exist. However, I'm afraid I have to report the reality is that they don't--and, it's a shame some lenders lead people to believe otherwise.

If a lender doesn't charge something akin to an origination fee, you can bet it will do something to make up for it. In the real world, for example, some will increase the interest rate, or charge unnecessary "discount points" and/or assorted "junk fees." Others will outright lie, and collect a "prepayment penalty" instead of calling the charge what it actually is. And others still (meaning, the real bad actors) will try to get away with all the above-and many borrowers let them do it, all the while thinking they're getting the deal of the century.

The truth is that there are nine (9) types of expense a borrower might encounter when it comes time to close a home loan:

• Lender compensation (such as "Origination" and "Broker's" fees, which are the traditional methods by which lenders are compensated for their efforts),
• Administrative Fees (to recoup the direct costs associated with extending credit),
• Discount Points (the price paid to "buy down"/reduce the interest rate to a lower level),
• Prepayment Penalties (for paying a loan off before the due date),
• Third-party expenses (to cover the actual cost of appraisals, title insurance, etc.),
• Illegitimate prepayment penalties (those with no basis in fact--meaning, mere disguised forms of lender revenue),
• Illegitimate "Discount Points" (sometimes included although not required to lower the interest rate--meaning, mere disguised forms of lender revenue),
• Marked-up third party expenses (otherwise legitimate expenses that are marked-up by the lender to result in additional lender revenue) , and
• So-called "junk" fees (mere disguised forms of lender revenue that go by names such as "Application Fee, "Commitment Fee" and "Setup Fee").

As I've said before, I think this is one of the dumbest things on the planet. Consequently, therefore, we've chosen to do things differently. As irrational as it may seem to our competition, we've chosen to be totally up-front about our loan-related charges and compensation.

Except when the borrower insists due to special circumstances, our pricing model calls for us to be compensated by way of only two (2) of the nine (9) items referenced above: (1) a compensatory charge (item 1 above) and (2) an Administrative Fee (item 2 above). In addition, we usually do our best to earn a Yield Spread Premium ("YSP"), which is the profit a lender can make when it sells a loan into the secondary market. However, when the loan is for an amount greater than our benchmark, we rebate any and all residual YSP to our customer.

Our method accomplishes a number of things:

• Greater transparency when it comes to pricing, expenses and what customers pay and we earn for our services,
• Speed to closing, since no time is wasted negotiating the lender's compensation, and
• Unparalleled customer service resulting from a focus on what's best for the borrower.

In the final analysis, there's no such thing as "free" anything. The simple fact of the matter is that the borrower will always wind up compensating the lender via a combination of some or all the above nine (9) elements--or, if not, the borrowwer can bet on paying a higher rate of interest.

In the final analysis, we think there's a category of customer who's smart enough to understand and appreciate candor, responsibility, personal service, knowledge and professionalism, all of which they can count on from us--but, not always from our competition. If you're one of them, give us a call.

EchoPoint Mortgage Company / CSW Home Loan
Phone: 214.559.0277
Email: info@cswhomeloan.com
Website: www.cswhomeloan.com
Blog: http://echopointmortgage.blogspot.com/