I think I have an idea of how a mortgage broker makes commission, but am still a little unclear. Could someone explain to me how a mortgage broker would receive his/her commission on a mortgage of $200,000 at 6.5% interest rate.
The value of goods and services quickly diminish after the service has been rendered.
A good broker is like any other professional and should be compensated for his or her knowledge of the industry. Brokers are paid to find the best loan for his or her clients and provide a hassle free transaction. Many Broker's group all third parties fees together, then place/hide their fees in the mix. Certain obvious fees are origination, discount points, credit reports, appraisals, surveys, processesing, application, automated underwriting. Then there's the junk fees depending on the difficulty of the loan. And sometimes there's the yield spread which is compensation for selling the rate or in somecases compensation from the wholesaler to the broker for $xxx,xxx amount of business within a certain time frame.
Sounds like your concerned about a business transaction that you are either involved in or about to embark on.
Myself, I'm not really concerned about someone making a profit from my business......though, I don't like being treated like a bag of groceries and I don't like being shafted. If you are really concerned about fees, take time to hunt around. There's many brokers willing to flat fee you in exchange for regular business.
Brokers get paid in the form of origination charged at closing and also with a premium paid by the lender based upon the rate you were locked in. The higher the rate the higher the premium, which is a % of the loan amount. Most brokers try to balance what they make between both the rate and costs. Depending on the loan size, some will charge 1% origination and make the rest off the interest rate. (probably with out even telling you). The down side to this is that they're most likely not addressing what your goals are with that property. If you were holding short term, wouldnt it have been better to have no origination costs and maybe a slightly higher rate. Just the opposite when it comes to long term holds; it would be much better to pay the broker what he is looking to make in the form of origination and have the interest rate as low as possible with no build in. On smaller loans you'll find that the lender has some additional charges that must be passed through from the broker to the client. In this case, there may not be an opportunity for the broker to get a premium from the lender. So origination is higher no matter how long you plan to hold.