How Not to Pay Mortgage Broker Commissions
Mortgage brokers work on commission, which are paid by you, by the lender, or by both you and the lender. If you work with a mortgage broker, the industry norm is for them to charge you an origination fee equal to 1 percent of the loan amount.
The interest rate and loan terms you are quoted will usually be the rates and terms for which you qualify assuming you pay a 1 percent origination fee -- this reduces what the lender will have to pay the mortgage broker. You have the option, though, of taking a loan at "par pricing" - this simply means that you pay no origination fee, and the lender assumes full responsibility for paying the mortgage broker. However, because par pricing puts the onus on the lender to compensate the mortgage broker, the par pricing interest rates are higher and terms might be more burdensome than those you would get if you paid an origination fee.
If you ask them to give you good faith estimates with (a) a one-percent origination fee and (b) at par pricing, your mortgage broker can help you do the math to determine which is the most cost effective way for you to go.
For example, assume that you are borrowing $900,000 -- 1 percent of your loan amount is $9,000, and the interest rate differential between par pricing and pricing with a 1 percent origination fee will cost you $2,000 per year that you have the loan. If you are taking a 3/1 ARM, and know you will be refinancing before the three year introductory fixed rate period is up, then the interest rate increase "at par" is $6,000 max -- it doesn't make sense to pay the $9,000 origination fee up front to save $6,000 over time. If you have a lower loan amount, or your lender sets very different interest rates for par and non-par mortgages, or you simply intend to keep your loan long enough to save more on the interest rate than you will by not paying the origination fee, it may make sense to pay your mortgage broker up front and save more on your interest rate over time.
Note: Subprime borrowers are often charged origination fees larger than one-percent on grounds that it is harder for the broker to find a loan for which they will qualify. In any event, if you are being charged more than a two-percent origination fee (or more than 3 percent total fees by your mortgage brokerage), you should definitely get a second opinion from a reputable mortgage professional.