How do banks, savings and loans, and mortgage bankers make their money on mortgage loans?

What are origination points and discount points, and how do they affect what a mortgage loan costs me?

What does APR include?

What Are the Major Types of Mortgages?

What Are the Fees Mortgage Lenders Charge for a Loan?

What Is Mortgage Insurance?

When is Mortgage Insurance Required?

What Is a Rate Lock?

When Is a Rate Lock Locked?

What Is "Truth In Lending"?

Who Is a Loan Officer and What Does a Loan Officer Do?

Are Closing Costs Tax Deductible?

How do banks, savings and loans, and mortgage bankers make their money on mortgage loans?

As you would expect, everyone involved in a loan makes money by charging interest or fees. There are generally three levels between the borrower and the actual money borrowed: the retail lender, the wholesale lender, and the actual source of the funds. The source of the funds for the loan charges interest and points for the money borrowed, and the wholesale and retail lenders charge points and fees for their services. The sum of the charges result in the interest, points and fees paid by the borrower over the life of the loan.

What are origination points and discount points, and how do they affect what a mortgage loan costs me?

The terms "Origination Points" and "Discount Points" are generally used interchangeably, but Origination Points are associated with conventional loans and Discount Points are associated with government loans such as FHA or VA. A point is one percent of the loan amount. Lenders charge points for lower interest loans, and the borrowers should evaluate their situations in deciding the best combination of interest rates and points for them. For example, a lender might charge 1.875 points for a 6.5% interest-rate, 30-year fixed-rate loan and no points for a 6.87% interest-rate, 30-year fixed-rate loan. For a loan amount of $200,000, if the borrower intends to stay in the home for the life of the loan, the lower interest loan would save $17,899.77 in interest over the life of the loan while costing the borrower $3,750 in points. If, on the other hand, the borrower intended to give up the loan (due to selling the property or refinancing the loan) after 3 years, the interest savings would only be $2,258.85, making the no-points, higher interest loan more cost effective.

What does APR include?

The Annual Percentage Rate (APR) is different from the interest rate for the loan. In addition to the interest, the APR includes other finance charges such as the loan origination fee (points), processing charges, and application fees. Specifically excluded from the APR are title, escrow, credit report and appraisal fees.

What Are the Major Types of Mortgages?

There are two major types of mortgage: Fixed Rate and Adjustable (or Variable) Rate

• Fixed rate: The interest rate of the loan will remain fixed over the life of the loan. This means the principal and interest payment will remain constant.

• Adjustable rate (ARM): The interest rate of the loan will remain fixed for a set period, usually 1, 3. 5, or 7 years, and then will be adjusted at a fixed interval, usually annually. The interest will be tied to an index plus a fixed margin. There will be a maximum interest rate annual increase (or decrease) and a maximum interest rate increase (or decrease) over the life of the loan.

• Balloon Mortgage: A fixed rate mortgage which is amortized over 30 years, but the balance of which is due after 5 or 7 years. Usually the mortgage is refinanced when the balloon is due.

• Piggyback Mortgage: A mortgage obtained with a second mortgage obtained at the same time. Since Private Mortgage Insurance is often required for mortgages in excess of 80% of the property value, borrowers often make a down payment of 10% of the property value, obtain a first mortgage for 80% of the value and a second mortgage for 10% of the value.

What Are the Fees Mortgage Lenders Charge for a Loan?

• Loan Origination Fee (Points): A fee charged by the lender, expressed in points. A point is equal to 1% of the loan amount. The points will vary with the interest rate the lender charges: the lower the interest rate, the higher the points. Borrowers may choose to pay a higher initial fee to keep their interest payments lower over the life of the loan. Interest rates and points can change on a daily, or even hourly, basis.

• Appraisal: The fee charged by an appraiser for his or her evaluation of the property. Note: With , the borrower pays the appraiser directly; so the borrower owns the appraisal. If the borrower decides to use another lender, the borrower can take the appraisal to the new lender, no questions, no hassle!

• Credit Report Fee: A fee charged by a credit reporting agency for completing the standard factual credit report.

• Tax Service Fee: A one-time fee to the borrower for a service which notifies the lender when the borrowers taxes are due and payable or delinquent.

• Escrow Fee: The fee charged by the title/escrow company for their services as a disinterested third party during closing.

• Notary Fees: Fees charged by the title/escrow company for notarizing the legal documents at closing.

• Title Fees: Fees charged by the title/escrow company for researching public records, preparation of a preliminary and final title report and providing title insurance.

• Recording Fees: Fees charged by the title/escrow company for recording the Deed of Trust at the County Recorder's office.

• Termite Inspection: Fee, generally charged to the borrower, to have the property inspected for any infection or infestation of termites, dry rot, fungus, etc.

• Private Mortgage Insurance (PMI): Insurance that protects the lender in case of default by the borrower. The borrower will be required to pay the first year plus two month's premiums at the time of closing.

• Processing Fee: A fee charged by the lender for processing the loan application.

• Document Fee: A fee charged by the lender for preparing the legal documents for title/escrow.

What Is Mortgage Insurance?

Private Mortgage Insurance (PMI) protects the lender against losses in case of default by the borrower (foreclosure). Mortgage insurance allows lenders to grant loans that would otherwise be considered too risky.

When Is Mortgage Insurance Required?

Generally, Mortgage insurance is required whenever the down payment is less than 20% of the purchase price.

What Is a Rate Lock?

A Rate Lock is a lender's commitment to "lock in" an interest rate and origination fee (points) for a period of time. The advantage to "locking in" the terms of a loan are that if the rates go up, the lender is required to honor the rates at the time of the lock. The loan must be completed within the time of the lock; otherwise the terms of the loan will be either those in effect at the time of closing or those in effect at the time of the lock, whichever are worse.

When Is a Rate Lock Locked?

A Rate Lock is official only when it has been acknowledged by letter or email from an official. When you wish to lock in your rate and point combination, you must ensure you get written confirmation of your lock. The borrower can lock after rates are posted for the day until 4:00 pm.

What Is "Truth In Lending"?

Federal law requires lenders to provide specific disclosures to borrowers within three days of receiving a loan application. These disclosures are referred to as Truth In Lending or Regulation Z disclosures, and they are intended to provide the borrowers with a "good faith" estimate of the fees, APR, and program specifics of the credit they are applying for.

Who Is a Loan Officer and What Does a Loan Officer Do?

A Loan Officer or Loan Agent is normally the lender's liaison with the borrower. The Loan Officer explains loan programs to the borrower and helps the borrower fill out forms and gather required documentation. Normally, the Loan Officer earns a commission on each loan completed, which is part of the loan origination fee (points) paid for the loan.

Are Closing Costs Tax Deductible?

Some of the closing costs are tax deductible. The loan origination fee (points), prepaid interest, and prepaid taxes are normally tax deductible. You should always check with your tax professional.