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How Much Does Your Lender Make on Your Loan
How much does your lender make on your loan?
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How much money a lender makes from your mortgage loan depends on several things. Such as the kind of loan he deals with, his business model, and the terms of your loan.
Here is how lenders generally profit from mortgage loans, step by step:
Interest Income
Interest Rates: Interest traditionally forms a major part of lenders’ revenues, including for secured mortgages. When a mortgage loan is made, and an interest rate is charged, the rate is applied to the loan. The higher the interest, the more returns the lender makes over the lifespan of the loan repayment.
Interest Payments: Usually, the interest is backloaded. This means that when one has taken a mortgage in earlier years with the same repayment amount, a substantial portion is attributable to interest, while the principal is low.
Origination Fees
What It Is: These are typically fees that a lender will apply in the preparation or underwriting of the loan. Such can include loan submission, processing, and underwriting fees.
Typical Amount:
Origination Fees have been cited as being in the normal range of 0.5% to 1% of the loan amount, with deviations.
Points
Discount Points are earned when you pay some money before. The discount shows a discount on the loan, so you can get a lower interest rate on your mortgage. One point is usually 1 percent of the mortgage loan amount.
Lender Profit: In this instance, lenders generate income from these points, which are quick to earn and lessen the lender’s risk.
Mortgage Servicing Fees
Servicing Income: Mortgage servicing fees are fees charged by lenders or mortgage banks throughout the life of the loan. These fees are for activities associated with that loan, including receipt of installments, supervision of trust accounts, and handling client communication.
Monthly Fees: Such payments are usually a part of the monthly repayment plan. Their amount or range depends on a certain servicer and the loan terms.
Secondary Market Sales
Selling Loans: It is common for lending institutions to offload their mortgage loans to other parties termed as the secondary market investors. They are likely to sell that loan at a profit. This includes repaid charges on the loan and a charge due depending on the terms of the loan.
Servicing Rights: Lenders may also sell a mortgagor’s servicing rights, which earns them other income through servicing the owned loan.
Prepayment Penalties
What it is: A few types of loans may come with prepayment penalties if the borrower pays the loan before the agreed-upon time. This is a way of reimbursing the lender, who is deprived of revenue from the interest on the loan.
Impact on Profit: The lenders may collect these penalties (if applicable). As such, they will be better off profit-wise on the loan. Hence, they may be called late repayment penalties.
Yield Spread Premium (YSP)
What It Is: YSP is a payment that the lender makes to the mortgage broker or loan officer to provide loans higher than the set rate.
Impact on Borrower: This practice could sometimes introduce extra charges to the borrower’s interest rates because of higher loan rates.
Considerations for Borrowers
Comparison Shopping is imperative. This is because lenders have different terms when lending you money. Such information helps you understand mortgage basics and how different fees and rates translate into your loan balance.
Transparency: Ask for a Loan Estimate (LE) from any lender, mentioning their fees and costs for that loan, to avoid the tedious risks of spending money on services without knowing how they were done.