There are varieties of ways through which lenders manage to make money from mortgages. Essentially, lenders get into the business in order to get money from the loans they offer you to mortgage a property. They have their own funds from which they borrow these funds; as such, you will find that there are a number of brokers who make this money while acting as intermediaries between you the borrower and the lender.
These lenders may make use of depositor funds; alternatively, they may choose to borrow the money from other larger banks using a preferred interest rate that will fund the loans accrued. Therefore, they get to make money from the loan as well as the fees that the loan accrues during the mortgage period.
Here are some of the methods that these blenders use in order to ensure that they make money in the process of giving you the money you require to mortgage a property.
Mortgage Backed Securities
Lenders know the art of bundling safer and less profitable mortgages that come with a higher risk as well as higher profit on mortgage-backed securities. Essentially, you will find that insurance companies and pension funds will buy such securities in order to provide a long-term source of income. The lender will make a profit when they sell these loans and reduce their risk.
Yield Spread Premium
The main ways through which lender make their money is from yield spread premium also known as YSP. This is the main difference between the interest they charge you and the interest they pay when replacing the amount of money lent out to you. For instance, in case the bank is giving the loan to the lender at 3% and you get to pay an interest of 4.5% on the same loan, this goes to show that the lender gets to earn 1.5% on the said loan. This is how some mortgage companies make their income.
Loan closing fees
Upon closing the loan repayment, the lenders charge you a lenders fee charge. The fee includes processing fee, underwriting fee, origination fee, application fee, as well as lock fee. All these fees go to the lender as part of administrative fees for providing you a mortgage loan. Other fees like those that the origination fee goes to the loan officer for the services provided to the lender. There are additional fees known as “junk fees” that have no particular legitimate purpose. They are only meant for profit purposes. These fees are spelled out upfront and are different from lender to lender. They are included in the Good Faith Estimate.
This is another source of loan revenue. The lenders continue to service loans that they have sold to the mortgage backed securities. The ensure that they process payments for the loans and do all the administrative tasks regarding the loan that you as the purchaser of the said loan may have little knowledge to manage. They will make a small percentage on the loan and this will be charged for a specific period in exchange for servicing the loan for your mortgage. There are other methods such as Discount points that are given during the closing of loan payment and are 1% of the loan taken for your mortgage.
In conclusion, these are some of the tactics used by mortgage lenders to earn some money from your mortgage. Ensure you get as much education as you can on-line before choosing your lender as all lender have different fees and tactics to earning money from your mortgage.