Mortgage brokers operate like most other types of brokers. They typically act as the intermediary who arranges a loan between a borrower and a lender. When you use a broker, you have the option of who pays the broker’s fees. You can pay the fees up-front at closing or let the lender pay for the broker. Lenders pay brokers a mortgage yield spread premium when they place borrowers into a higher interest-rate mortgage than the bank would offer directly. When you’re considering mortgage terms and broker’s fees, you calculate the cost difference between taking the yield spread and paying up-front.
In order to calculate a mortgage yield spread, you will need to determine whether or not reduced upfront fees as part of one mortgage offer will ultimately yield lower total payments than a second mortgage offer with a higher upfront fee and a reduced interest rate.
Yield Spread Premium
Lenders pay rebates to brokers based on the spread between the lowest possible interest rate and the rate at which the borrower took the loan. Rebates are offered in points, similar to how you can buy points to pay down the interest rate up front. A point is 1 percent of the total loan.
So the bank would offer your broker a certain rate at zero points and then decrease the rate for points paid or increase the rate for points rebated. The mortgage yield spread is the difference between the zero point rate and the rate you take. So if you’re offered 4 percent at zero points or 5 percent with no costs, the yield spread is 1 percent.
Exploring Disclosure Requirements
Mortgage brokers must disclose any yield spread premium at various points during the transaction. The broker must list the additional interest rate you’ll pay in exchange for the rebate on page 2 of the Good Faith Estimate, which you receive at application and acceptance of the loan, and on line 802 of the HUD-1 Settlement Statement, which you receive during closing.
The disclosure requirements are designed to limit the ability of an unscrupulous broker to steer you into a higher interest-rate loan to increase the size of his rebate.
Evaluating Transparency Issues
Brokers don't have to disclose the mortgage yield spread at any other time than the three required disclosures. You might not know how much you’re paying in broker fees until after closing if you don’t know where to look in the paperwork. If a broker is quoting you already marked-up rates, you can’t calculate mortgage yield spread until you review the Good Faith Estimate and Settlement Statement.
Some brokers will agree to a fee in advance and provide you with the wholesale interest rates so you can decide how to finance your origination and closing costs.
Cost of Mortgage Yield Spread
Calculating the mortgage yield spread allows you to figure out the most efficient way to pay the broker’s fees. Say your broker charges a 1 percent fee plus a flat fee of $300. You have the option to take a 4 percent mortgage and the full charge of $2,300 on a $200,000 loan or a 4.5 percent mortgage and just the flat $300 fee.
The second option costs $59 more per month over a 30-year loan, but saves $2,000 up front. It would take 34 months before the difference costs you more than the fee. By the end of 30 years, the difference will cost you $19,234.
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