Hidden bonuses drive up interest rates for unsuspecting consumers
May 18, 2006 (Press Release) --
Lender bonuses cost YOU thousands of dollars in interest, and hundreds of dollars in monthly purchasing power.
Independent mortgage reps have a built-in incentive to offer higher interest rates than otherwise available on home loans. Lenders pay brokers increasing “rebates” or “yield spread premiums,” the higher the interest rate on the loan. Federal regulations currently require NO disclosure of this incentive, and State requirements vary widely. Some lenders disclose, but not always clearly.
The incentive can range from less than a quarter point to over three points (and varies by lender). A “point” is 1% of the loan amount. Each lender has a “par” rate (no rebate) with each rate above that yielding progressively more rebate. Most borrowers don’t know about this disadvantageous system, and wind up paying origination fees on top of the broker’s rebate; that is, the broker typically receives much higher compensation than disclosed.
These so-called “fluffed” interest rates cause higher monthly payments, and cost borrowers unnecessary interest. A broker who induces a client to take a 7.00% rate instead of an available 6.00% rate, on a $500,000.00, 30-year-fixed loan, has created $118,354.00 of extra interest payments over the loan term.
Rebate-chasing also reduces the borrower’s buying power. In the scenario above, the borrower can buy $500.00 LESS house per month - if he accepts the higher rate.
Prospective borrowers should insist on full disclosure of the lender’s adjusted par rate and rebates. (“Adjusted” means the rate reflecting the borrower’s credit score, assets, income, etc.) They should aggressively cap the broker’s maximum compensation (total received from fees + rebate), and closely examine their estimated and final closing statements to detect any variance. Many borrowers don’t realize that they can say “no,” and ask for reduced fees, anytime. If the broker refuses, borrowers should not hesitate to shop around.
Independent mortgage reps have a built-in incentive to offer higher interest rates than otherwise available on home loans. Lenders pay brokers increasing “rebates” or “yield spread premiums,” the higher the interest rate on the loan. Federal regulations currently require NO disclosure of this incentive, and State requirements vary widely. Some lenders disclose, but not always clearly.
The incentive can range from less than a quarter point to over three points (and varies by lender). A “point” is 1% of the loan amount. Each lender has a “par” rate (no rebate) with each rate above that yielding progressively more rebate. Most borrowers don’t know about this disadvantageous system, and wind up paying origination fees on top of the broker’s rebate; that is, the broker typically receives much higher compensation than disclosed.
These so-called “fluffed” interest rates cause higher monthly payments, and cost borrowers unnecessary interest. A broker who induces a client to take a 7.00% rate instead of an available 6.00% rate, on a $500,000.00, 30-year-fixed loan, has created $118,354.00 of extra interest payments over the loan term.
Rebate-chasing also reduces the borrower’s buying power. In the scenario above, the borrower can buy $500.00 LESS house per month - if he accepts the higher rate.
Prospective borrowers should insist on full disclosure of the lender’s adjusted par rate and rebates. (“Adjusted” means the rate reflecting the borrower’s credit score, assets, income, etc.) They should aggressively cap the broker’s maximum compensation (total received from fees + rebate), and closely examine their estimated and final closing statements to detect any variance. Many borrowers don’t realize that they can say “no,” and ask for reduced fees, anytime. If the broker refuses, borrowers should not hesitate to shop around.
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