Buy Down Your Mortgage Rate

How do you buy down your mortgage rate? Before answering that question, I think it is important to first discuss what it MEANS to buy down your mortgage rate. Then we can talk about the how.

What Does It Mean To Buy Down Your Mortgage Rate?

When a mortgage broker places your mortgage with a “standard” lender, they get paid what is known as “finder’s fee”. This is basically a commission that they receive for bringing your business to that lender. A mortgage broker can SOMETIMES buy down your mortgage rate by foregoing some of that commission. You may ask: why did he put “standard” in quotations? That’s because some lenders like private lenders do not pay a finder’s fee. In this case, if the mortgage broker wants to get paid, he/she needs to either charge a brokerage fee or take a part of the lender’s fee.

What Is A Lender Fee?

A lender fee is a lump sum fee that some lenders will charge up front. This adds to the cost of the mortgage on top of interest. Normally the client only pays a lender fee when they are higher risk (example: bad credit). The lender will charge this fee to mitigate their risk. If this lender does not pay a finder’s fee to the mortgage broker, they will increase this fee as payment for their services. For example, a lender may charge a 1.5% lender fee; 1% of that goes to the lender and 0.5% goes to the mortgage broker.

How Much Is The Finder’s Fee?

Depending on the type of lender, the finder’s fee can range anywhere from 0.5% (known in the industry as 50BPS) to 1% (100BPS) or more. This is the percentage of the principal amount of the mortgage. For example, if the mortgage broker is getting paid 100BPS on a $200,000 mortgage, he/she will get paid $2000.

The Borrower Always Pays

No matter which route the client takes; whether they use a mortgage broker or they go directly into the bank, they pay. You may not see it – but it is factored into the costs of the mortgage. Whether arranged by a broker or an in-house mortgage specialist at a bank, the bank will make their money off of you through:

• interest rate
• penalties
• lender fees

Or any combination thereof. Drop the rate and the lender fees may go up. Increase the rate and the penalties may go down. They all fluctuate with each other but rest assured; the bank always gets paid.

Now Back To The Original Question: How To Buy Down Your Mortgage Rate

In an effort to compete with different lenders, one tool that the mortgage broker sometimes has at his/her disposal is to buy down your mortgage rates. They will reduce their fee in exchange for decreasing the mortgage rate. This is not always possible; and when it is, there are limits. And it’s expensive. For example, it may cost the mortgage broker 20BPS of their finder’s fee to buy down your mortgage rate by 0.05%. If we go back to our example of the $200K mortgage, that means that the broker will be sacrificing $400 of his/her finder’s fee to reduce your mortgage rate by 0.05%.

Be Kind To Your Broker

When you do a mortgage, the real estate agents, bank, lawyers and appraiser all get paid for their time and service. A good mortgage broker will also put a lot of time and effort into your file, negotiating and consulting with all of the above on your behalf hopefully saving you money, time, giving you advice and peace of mind. So please be kind to your broker!

Robert Floris is a Mortgage Broker. His office is located at 651 Fennell Avenue East in Hamilton, Ontario. If you would like to speak with Robert, he can be reached at 905-574-9200 #215. Alternatively, you can contact Robert here.

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