Knowing how mortgage brokers get paid can make a large difference to how you negotiate for your next home loan.
How do brokers get paid?
September 2nd, 2010
Mortgage brokers can be useful for finding either cheaper or more unusual mortgages, but like everyone else they need remuneration for their efforts. It is a good idea to know how a mortgage broker gets paid.
There are basically two methods: through an up-front fee charged by the mortgage broker to the house buyer, or by a commission charged to the mortgage lender. The choice of how to pay the mortgage broker can have profound implications on how the loan is structured.
The commission from the mortgage lender is often preferred by home buyers because it appears to be free for them. However, this is an illusion. The mortgage lender will want to make back its costs, including the cost of the commission, and therefore they will add a surcharge of some sort into the mortgage, either as part of the arrangement fee or through higher interest rates charged on the loan.
The arrangement fee is charged to the home buyer by the mortgage provider at the initiation of the loan and it is added onto the loan’s principal. It is designed to cover the up-front costs for writing the loan, such as credit checks, the home valuation, and the administration behind securing the title. Many home owners don’t notice this cost as it is simply added to the loan. However, it is a very real cost. Not only must it be paid off by the home owner, but it’s paid off at the end of the loan, and so it accrues interest throughout the term—in many cases, for thirty years.
Similarly, it can be hard to notice the broker’s commission when it is charged out as higher interest rates, because the money is spread over monthly payments for thirty years.
Paying a broker’s fee up front may make the fee more obvious, but for a homeowner who has the money it can be the better option. Sometimes if the fee is paid up front, then any commissions paid by the mortgage lender to the broker can be reimbursed to the home buyer. Also, if the home buyer is paying the fee, the mortgage broker may not be tempted to look for loans with the companies that pay the high commissions, instead examining the entire mortgage market to find the best deal for the buyer. However, this does mean that the money must be available to pay the fee.
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