How Do Banks Make Money From My Mortgage?

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Banks Make More Than Interest On Your Mortgage!

If you’ve taken out a mortgage chances are that soon after that you received a letter saying your mortgage had been sold to another lender. It’s very possible this has happened to you more than once on the same mortgage.

When borrowing money to buy a house the bank providing your mortgage makes money on more than just the interest on your loan. The lending bank is called the mortgage originator. The mortgage originator will most often sell the mortgage into the secondary mortgage market.

Here is a look at the role of the mortgage originator in the life of a mortgage and how they make money on your mortgage.mortgages

The Mortgage Originator

The mortgage originator is the first company involved in the secondary mortgage market. Mortgage originators consist of banks, mortgage bankers and mortgage brokers. One distinction to note is that banks and mortgage bankers use their own funds to close mortgages and mortgage brokers do not. Mortgage brokers act as independent agents for banks or mortgage bankers. While banks use their traditional sources of funding to close loans, mortgage bankers typically use what is known as a warehouse line of credit to fund loans. Most banks, and nearly all mortgage bankers, quickly sell newly originated mortgages into the secondary market.

However, depending on the size and sophistication of the originator, it might aggregate mortgages for a certain period of time before selling the whole package – it might also sell individual loans as they are originated. There is risk involved for an originator when it holds onto a mortgage after an interest rate has been quoted and locked in by a borrower.

If the mortgage is not simultaneously sold into the secondary market at the time the borrower locks the interest rate, interest rates could change, which changes the value of the mortgage in the secondary market and, ultimately, the profit the originator makes on the mortgage. Originators that aggregate mortgages before selling them should hedge their mortgage pipelines against interest rate shifts. There is a special type of transaction called a best efforts trade, designed for the sale of a single mortgage, which eliminates the need for the originator to hedge a mortgage. Smaller originators tend to use best efforts trades. (To learn more, see A Beginner’s Guide To Hedging.)

In general, mortgage originators make money through the fees that are charged to originate a mortgage and the difference between the interest rate given to a borrower and the premium a secondary market will pay for that interest rate.
– via Investopedia

Why Do Banks Sell Mortgages

You pay fees to take out a mortgage and pay interest on the money your borrow. If you think those are the only ways that your bank makes money on your mortgage, think again!

Here is a look at why mortgage originators sell mortgages on the secondary market and what a difference it can make to their profit.

Selling Mortgages – Why Does This Happen?

So, why are you getting this notice that your loan has been sold to another institution?

  • They need to keep a large enough pool of money on hand to make loans to other people. For example: If they lent out 50 million dollars over a period of 10 years they would need to have started out with a half a million dollars of cash. How will they keep on lending? Most mortgages are for 30 years, effectively tying up that money for this amount of time.
  • They make more money this way. Mortgage bankers make a commission when they sell your loan to another company. If a banker makes a point on a package of loans worth a million dollars, he makes $10,000 dollars (1 percent of $1,000,000) in immediate profit by selling them. The banker then has freed up one million dollars which he can re-loan to other customers. If he writes $1,000,000 in new loans this month, he (or she) can make another $10,000 dollars in points by selling those next month.

So, if $1,000,000 worth of loans are sold each month, the banker would net $120,000 for the year on those points alone. Compare this to holding onto the loans. If he keeps that same $1,000,000 in loans and earned interest at say 8 percent, he would earn $80,000 in a year on that same million. It becomes clear that selling loans is more profitable.

Selling off the loans every month: 12 x ($1,000,000 x .01) = $120,000

Keeping the loans and collecting the interest paid: $1,000,000 x .08 = $80,000
– via www.creditinfocenter.com

Do you have a mortgage? Has your mortgage changed hands since you first took it out?

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