How Lenders Make Their Money

As indicated above, lenders frequently don't make the bulk of their money on holding a loan for the full borrowing term. They make it in volume — bringing in loan applications, charging fees to the borrower to complete the loan, and very likely remarketing that loan at a later time, earning more income in the process. Why is that? So many borrowers refinance today and go from lender to lender that lenders like to make their money up front. You'll need to ask lenders some critical questions. Start by looking in your local newspaper or checking online for local mortgage rates and points, then check the following:

Ask whether your rate is fixed or adjustable. If you pick an adjustable rate, your payments will go up if interest rates do. (Chapter 14 provides more detail on adjustable-rate loans.) When calling around, ask your lenders and brokers for their current rates, and ask if they're quoting for the day or the week.

Ask about the loan's APR, which in addition to the interest rate includes points, broker's fees (if you use a broker), and certain other charges. Ask them to break it down. (See Chapter 8 for more background on fees and charges to investigate before applying for a loan.) If you go with a broker, you will be asked to pay points. Ask for a quote of the total value of points as a dollar figure, then compare. (For more information about mortgage brokers, see Chapter 10.)

Be specific about individual fees and what the lender does to earn them.

If your lender requires you to pay private mortgage insurance (PMI), make sure you know how much the monthly premium will be and how long you'll be required to carry the insurance.


by Lisa Holton