Do Banks Earn Money?
Many times the bank to which you create your mortgage payment isn’t really the owner of your mortgage. You may have applied for your loan with a bank, closed it with the same bank and today make your payments to that bank, but that bank may no longer own your loan. Banks frequently sell mortgages to government-backed mortgage shareholders, such as Fannie Mae and Freddie Mac, without notifying the homeowners.
Banks charge origination fees on first-mortgage products, including fixed-rate loans. Origination fees are charged as points. A point is 1 percent of the amount of the loan. The origination fee is what the lender charges the homeowner to get acquiring the loan. Processing fees and program fees are different fees lenders charge as a way to generate money on a mortgage.
Another source of benefit for a creditor is the underwriting fee. Lenders charge the borrower a fee to underwrite the loan, whether fixed-rate or adjustable-rate. When the loan closes, homeowners pay the underwriting fee. If the lender denies the loan, or if the loan does not close, the underwriting fee isn’t charged.
Banks which own loans collect interest as part of their monthly payment paid monthly. A 30-year, fixed-rate loan payment is mostly interest for the first 10 to 20 decades. The whole amount of interest on account of a 30-year, fixed-rate loan frequently exceeds the initial balance of the loan. This curiosity is that the profit banks earn for lending the money.
Banks cannot manage to maintain every loan they provide. Often these loans are packaged into pools of similar loans and sold to investors. Fannie Mae and Freddie Mac, the nation’s two biggest government-sponsored mortgage shareholders, buy mortgage loans from banks and other mortgage lenders and sell them mortgage-backed securities (MBS) to investors on Wall Street. Banks get additional money on top of the entire loan amount when they sell loans to these businesses.
After Fannie Mae and Freddie Mac buy such loans, the homeowners still send their payments to the original bank. Fannie Mae and Freddie Mac pay the bank a servicing fee for duties such as accepting the payments, reporting on the credit reporting agencies, providing customer support and managing the escrow accounts. That is why the business that you send your payment to does not necessarily own the mortgage you are paying.