Home mortgage interest rates and closing costs explained

Most lenders and brokers do not clearly explain the complicated factors that drive mortgage loan closing costs. Or how their MLO’s are compensated for their work on the loan

In this section, we will briefly explain Lender Paid closing costs. Think of this like a manufacturer’s rebate and think in terms of % of the total loan amount.

Since this is a fairly complex subject we’ll create a full guide and link to it here.

Lenders have a base interest rate with no closing costs factored in.

If you choose this rate your loan will likely have higher out-of-pocket closing costs..

If you choose to receive a “rebate” over and above the lender-paid broker compensation you will get money back at close to cover your title company fees, taxes, home insurance, recording fees, etc. This is a great choice if you will be selling the home or paying the loan off in the short-term, usually 3 to 5 years

True No Closing Cost Loans can be accomplished using this “rebate strategy” as well.

The only way lenders can offer these rebates is for you to choose to pay an interest rate that is higher than the lender’s “base interest rate”.

MLO compensation

Lender Paid VS Borrower Paid – You can choose how your MLO gets paid by the lender or by you.

The main difference and most important thing to remember is;  electing lender-paid broker compensation you cannot negotiate the fee amount your broker receives from the lender, paid on your behalf.  This is a fixed amount set with the lender by the Broker Business. It’s usually somewhere between 1% and 3% of your loan amount. Usually, brokers can only change this on a quarterly basis.

Borrower paid compensation

This is where it gets a little fuzzy. Borrower-paid compensation allows you the consumer to negotiate the amount the broker business receives at closing. That’s it!

It does not mean you are actually paying that amount to the broker. Furthermore, you can still receive a Lender Credit to cover the borrower-paid compensation and some or all of your closing costs.

Expert Tip: Ask your MLO what the “lender paid” Broker Business compensation is set at before bringing up Borrower Paid Compensation

Let me explain why you should do this. Under the borrower paid compensation plan the broker is allowed to charge you more than their lender-paid contract allows. Yes, when I mentioned you can negotiate I did not mean borrower-paid has to be cheaper for you. Although this is a general Idea.

Look to the right or scroll down to learn more about “Borrower Paid Compensation”

This will be a continuation of our discussion from the lender paid section of this page. We will also create an in-depth guide to explain exactly how mortgage rates are set for your loan. We'll drop a link here when the guide is ready.

Please understand mortgage rates and closing costs must be compared as one so when you get a rate quote you must also get a closing cost quote. The industry-standard form is called a Loan Estimate or LE.

Brokers and Lenders are required by law to send you a LE within 3 days of your loan application.

If you are shopping and have not yet "made an application" we can quote you verbally or give you a simple one-page worksheet. The figures may not be as accurate as a loan estimate - LE form

What I am trying to say is please don't call around for mortgage rates and just go with the lowest rate someone "quotes" you. You must know what that rate actually will cost you. The lowest rate mortgage could actually be the most expensive loan in your marketplace.

Borrower Paid Compensation - This just means you can ask the broker to do your loan for less than they will receive under "lender paid compensation". The broker can also ask you to pay more than they would get from their set "lender paid plan" amount

Expert tip: Always find out what your broker's lender paid amount is set at first.

It will be the same percentage for all of the loans that the broker sends to the lender. Typically somewhere between 1% and 3% of your loan amount.

Once a lender sends you an estimate on the official LE form the broker and lender fees cannot increase without a valid reason.

Most lenders and brokers don't go into detail about their compensation and how it can drive your rate up or down. But the compensation is the main factor that determines interest your interest rate.

I prefer all of our clients are well informed even if it is really confusing.

I'll finish up this section with another PRO TIP.

If you stay in your home long term and never refinance your mortgage. You'll save money by paying higher closing costs to get a lower interest rate. - This is not very common.

Most mortgage payors pay off their mortgage every 5 years by either selling the home or refinancing the mortgage for cash out or a better interest rate.

I always ask my clients how long they will keep this new mortgage. Then I tailor the quote to be the most cost-effective - this is how you really get the best rate on your new mortgage.

If you are not really sure about the future then it's best to use a "lender credit" to cover all of the compensation (origination charges). I call this your "base rate including all origination charges" and compensation. We used to call this a "zero point" loan, "no-points" " or "no broker fee" loan however those terms are not used much anymore unless you are talking to an "old hand".

So remember the only real difference between Borrower Paid and Lender Paid -  "borrower paid" is variable and  "lender paid" is a fixed amount.

You can buy the rate down and pay more in origination charges for a better rate under either plan.

You can get lender credits to cover all of the origination charges and possibly some of the other closing costs and prepaid items under either plan as well.