MORTGAGE LOAN CHARGES: SOME YOU SEE, SOME YOU DON’T

Understanding Service Release Premiums and Loan Servicing Costs

 

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Knowing the vast differences between the types of mortgage lenders you have to choose from is a topic we discussed in an earlier post (see “The Difference Between Mortgage Brokers and Mortgage Bankers”). In essence, regulations recently put in place by the Dodd-Frank Act put a cap on the amount of money that a mortgage broker can earn on a loan, making Mortgage Brokers your best source for home loan financing.

However, as Rick Piette, owner of Premier Mortgage Lending explains, “We discuss “Visible vs. Invisible Loan Charges” in our Home Loans 101 video at our KnowBeforeYouOweNevada.com site. Yet even when armed with that particular knowledge about limits, it’s still possible that as a borrower – you can receive Loan Estimates from banks or mortgage bankers that don’t clearly define how much money they will make off of your loan.

“So we’d like to help shed a little light on how that happens. To Premier Mortgage Lending, it’s a matter of transparency. We simply believe people should know what they’re paying for – regardless what the product is – and mortgage loans should be no different.”

That is one of the reasons that Premier Mortgage Lending fully supports the goals of the Consumer Financial Protection Bureau (CFPB), specifically as they pertain to mortgage lending. The CFPB’s national “Know Before You Owe” program inspired the local Las Vegas mortgage broker to carry their message even further through the creation of its KnowBeforeYouOweNevada.com site.

How Lenders Earn Money On Your Loan

Lenders aren’t obligated to disclose this, but the fact is most banks and mortgage bankers make money in two ways:

1) First, they make money up front by charging fees.

2) Second, they make money when they sell your loan.

With #1, that’s the “visible” part – the fees that are shown right on your Loan Estimate form. This includes line items for Loan Origination Fee, Underwriting Fees, Document Prep Fees, and so on. It can be the source of literally thousands of dollars of income for a mortgage lender. But these costs can also vary widely from one lender to another, and it’s one of the potentially expensive reasons you should always shop around for the best mortgage loan. Premier Mortgage Lending, by the way, charges none of these fees in our No Fee traditional loans. (See? You just saved money already!)

But with #2, this is where the “invisible” charges enter – and the key terms to remember for these charges are “Mortgage Lender,” “Loan Servicer,” and “Service Release Premium” (SRP). To clarify:

1) Your mortgage lender is the financial institution that loaned you the money;

2) The loan servicer handles the day-to-day tasks of managing your loan (such as processing payments, managing your escrow account, etc.)

3) The Service Release Premium is so called because the lender who wrote the loan releases the right to “service” the loan. These “servicing sales” can generate millions of dollars of additional income to banks and mortgage bankers.

How Does This Puzzle of Confusing Terms Affect You?

“Here’s how it works,” Piette explains.

“A loan servicer buys your loan from a mortgage lender through a Service Release Premium (SRP). Why? Because the servicer will receive future income from the mortgage interest. The higher the interest rate is on the loan, the more they will earn – and the more they are willing to pay the lender for the SRP. The bottom line is, the lender makes more money in Service Release Premiums on loans with higher interest rates, and less money on loans with lower interest rates.”

That is why some lenders want you to pay a higher interest rate for your mortgage loan than you may actually qualify for. Because the higher rate the lender can sell you, the more they receive in SRPs when they sell your loan. “Other than having to compete with other lenders for your business, the lender doesn’t have any incentive to offer you the lowest interest rate,” explains Rick Piette.

Additionally, these lenders will often ‘double-dip’: Charging high fees up front (Loan Origination, etc.) and also collect Service Release Premiums on the back end.

Still with us so far? Because there’s still one more very important thing that every borrower should know:

Mortgage brokers can only receive income that is fully disclosed – complete transparency. They cannot earn additional income by collecting Service Release Premiums. In short, a mortgage broker cannot receive compensation based on the interest rate of a loan.

“These are all key things for you to keep in mind the next time you’re comparing mortgage loan offers,” adds Piette, “because they can all affect the amount of money you pay for your loan. And if we’re not mistaken, there are probably many other things that you’d rather spend your money on – rather than putting it into a lender’s pocket.

Whew. That’s a lot to follow, and we hope we’ve helped to make sense of it all.

“But if you still have questions or would like help comparing apples-to-apples with your mortgage loan offers, give us a call,” states Piette. “We’ll be happy to help – because our only goal is that you get the best deal possible. Even if it’s not with Premier Mortgage, we’ll tell you that, too.”

Premier Mortgage Lending, NMLS #393282, is located at 701 N. Green Valley Pkwy., Suite 125, Henderson, 89074. The full-service lender is a member of the Las Vegas and Boulder City Chamber of Commerce, Better Business Bureau and Southern Nevada Home Builders Association, as well as an affiliate member of the Greater Las Vegas Association of Realtors.