I don't know about you, but nothing makes me think of mortgages more than a deceased rapper. What exactly do we have in common? As the famous Tupac Shakur said in his song Changes, "I gotta get paid." Well, so do I. Interestingly enough, one of my client's most frequently asked questions is 'How do you make money?' (perhaps it is because we offer great rates and low closing costs?). It is not easily apparent in many cases how a mortgage planner earns money, but I would like to show you how.
Let's go back to our handy-dandy rate sheet:
Let's go ahead and stick with the first box in the top left corner (labeled '30 Yr Fixed'). The left column shows us the particular interest rates, while the right column shows us the price. The price column represents the dollar amount (or yield) we can sell the loan for in the secondary market. It is expressed as a percentage, so the amount of money we make is dependent upon the loan size.
Hopefully this example will help. I have a client who would like to borrower $100,000. We will assume that there are no adjustments to the rate and the client is interested in a 0 point rate. If we look at the rate sheet and we choose a rate of 6.375%, we see that the price is 101.164. What this means is that if we loan money at 6.375%, we will be able to sell that loan in the secondary market for 101.164% of the loan amount. In this case, we would sell the $100,000 loan for $101,164. Immediately, we would throw $100,000 back into our coffers so we can lend more money. The remaining $1,164 is the revenue that we make on the loan. The revenue is then divided up between the IRS, Patriot Funding, the IRS, me, and the IRS.
The percentage of revenue generated on each loan I do is typically between .75% and 2% of the loan amount. The revenue goal depends on a variety of factors, not the least of which is the size of the loan and complexity of the transaction. I wouldn't expect to earn 2% on a $650,000 slam-dunk refinance. Likewise, I would not want to take on a $50,000 FHA rehab loan for only .75% in revenue.
From a disclosure standpoint, mortgage brokers are required to disclose the revenue earned on their loans. Mortgage bankers are not required to disclose this figure, but I still think it's important that my clients are aware of how the system works. My company, Patriot Funding, is both a mortgage broker and a mortgage banker. We will act as a mortgage banker whenever possible (approximately 80% of the time)which means that we are not disclosing revenue on the majority of our loans. This is a big part of the reason why I wanted to shed some insight as to how the process works.
Please email me or leave me a comment if you have any questions about any of this info or if any of it is fuzzy and needs further explanation, or even if you are just a fan of Tupac.
Thanks for reading and have a great weekend!
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