How Money is Made by Mortgage Lenders
Lenders are in the company of making money from loans. Mortgage lenders lend straight out of their own funds, so they are different from agents who earn money acting as intermediaries between lenders and borrowers. Lenders can utilize depositor’s funds or they may borrow money from larger banks in a preferred interest rate to finance loans. They earn money from both the loan itself and from penalties throughout the loan process.
Yield Spread Premium
The main way lenders earn money is by the yield spread premium, or YSP. This is the distinction between what they charge you in interest and what they pay in interest for substituting the money. If the bank lending fee is 3 percent and the interest rate on your loan is 4.5 %, the creditor is making 1.5 percent on the loan.
Mortgage Backed Securities
Lenders package safer, less profitable mortgages with riskier higher profit ones into packages called mortgage backed securities. Entities like pension funds and insurance companies buy these securities as a source of long-term income. While decreasing their own risk lenders make a gain on the sale of those loans.
As another source of loan revenue, these creditors will often continue to service the loans offered in their mortgage backed securities. They process payments and conduct all of the administrative tasks connected with the loan which the buyer may not be equipped to perform. They either make a small number of the loan or charge a periodic fee in exchange for servicing the loans.
Loan Closing Fees
Lenders charge fees to the borrower at closing. The loan origination fee, underwriting fee, processing fee, application fee and loan lock fee are all examples of charges that go straight to the creditor. Some, like the origination fee, go to pay the loan officer for her work. Others have been”junk fees” which don’t have any valid purpose and are pure gain. Each creditor fees different prices, spelled out upfront at the Good Faith Estimate.
A discount point is a section of the loan amount charged upfront at final and also used to buy down the interest rate of the mortgage. Lenders may have a smaller YSP on a lower interest rate and also make up the difference with charging factors. A discount point is equal to 1 percent of the amount of the loan and buys a decrease of anyplace from 0.125 to 0.25 percent.