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1. Where Mortgage Loans Really Come From

The big myth about mortgage money has been around for a long, long time. It's about where the money comes from. Lenders don't use money deposited by other customers to make mortgage loans. In fact, it's most likely that they borrow the money from somewhere else. This is called their credit line, and it is where mortgage bankers get their money.

Other mortgage companies don't actually make loans at all; instead, they simply arrange the financing. This is called brokering. This is important, because if you don't understand how the lender makes its money, you won't understand where the pitfalls are.

By knowing how both a mortgage broker and a mortgage banker make money, you'll begin to get a glimpse of how each operates. This will help you uncover some of the mysteries of the mortgage process.

Your bank brokers. Your credit union brokers. Even your mortgage banker brokers. The main distinction in issuing mortgages is whether the loan application is taken by a mortgage broker who finds your loan for you or by a mortgage banker who has the money lying around somewhere and is anxious to lend that money to you as long as you pay it back on time and with a little interest, thank you very much. Lenders make money in three basic ways:

1. They collect the money each month in the form of interest.

2. They make the money up front in junk fees, origination charges, and points.

3. They sell the loan, either at the time when your loan is being financed or later on down the road, to other lenders or investors who buy and sell mortgage loans.

Mortgage brokers make all their money up front. You won't send your broker any house payments, and your broker doesn't "sell" your mortgage. A common misperception is that a mortgage broker will sell your loan to a lender.

You'll see this statement made time and time again by people who don't know any better. You'll even hear mortgage brokers themselves talk about how they sell loans in order to make money. They say that they take a loan application, find a lender for you, and then sell your loan to that lender.

That's not what really happens. A mortgage broker doesn't "own" your loan. One can sell only something that one owns. Instead, a mortgage broker gets paid either by you or by the lender who provides your financing, or by some combination of the two. But your loan is not sold. When you hear this term being bandied about by a mortgage broker, the broker is just trying to sound important. In fact, the broker may be important, but it's not because he has the ability to sell your loan to the highest bidder (or the lowest, for that matter).

A mortgage banker funds mortgages using its own money. A mortgage broker does not. A mortgage banker can either keep your loan or sell it to someone else because it owns the loan. Mortgage bankers include the retail banks that you see on nearly every street corner and credit unions.

Mortgage bankers make money by making loans, but first they have to have the money in order to lend it, right? Guess what? They borrow it from other lenders or establish a credit line at their bank or with other investors. Your bank doesn't open up its vault, raid its customers' piggy banks, and use those funds to make a mortgage loan.

If you're getting your mortgage from your mortgage banker or your bank and you think that your loyalty to it will be a deciding factor in the loan approval, you're wrong. Mortgage bankers can borrow the money they need in one lump sum at a negotiated interest rate, park that money in an interest-bearing account, and begin issuing mortgage loans one loan at a time.

Let's say a credit line is available at 3.00 percent. A lender will arrange that financing, then turn around and issue mortgage loans.

An individual loan officer at that mortgage company will find a borrower for her employer. For example, a buyer wants a 30-year fixed-rate loan and gets it at 6.00 percent. The lender transfers the money from its credit line to make the mortgage. The lender can then keep that mortgage and collect the monthly payments in the form of interest each month based upon the loan amount and the rate on that loan.

The lender does this over and over again, month after month, and makes money in the form of interest.

Or the lender can decide to sell that loan to someone else. Lenders can make money by finding someone else who is willing to pay a certain amount of money to buy the loans it has made. How much do loans cost? Whatever the market decides, but typically your banker will make a 1 percent "commission" on each loan. If a lender sells $100 million in mortgages to someone else, the lender will make $1 million immediately and will not have to wait for it in the form of monthly payments.

For instance, a 30-year mortgage loan at 7.00 percent on $200,000 has a monthly payment of $1,330 per month. Over 30 years, that loan yields just over $279,000, in addition to paying back the original $200,000 borrowed. That's a lot of money.

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