To the right is a cutout of a sample wholesale interest rate sheet provided by a wholesale mortgage company. On the left column, you will see descending interest rates from top to bottom. They are the range of available interest rates for a conventional Fannie Mae and Freddie Mac 30 year mortgage for the day the rate sheet was prepared. To the right of the interest rate you will see columns of numerical figures in red and black. Each column is labeled with 15, 30, 45, 60 (these are the lock period in days). These columns are rebates (yield spread premiums) available to brokers for a given rate and a lock period.

The rebate in red is the amount paid to the broker for offering the interest rate to the left of it. Anything in black is the % of the loan that needs to be paid to the investor in exchange for the rate to the left of it.

Let's go through a few examples. For discussion's sake we will use a loan amount of $150,000.00 (and you are putting 20% down) for our examples. We'll start with the row in the blue box.

Example #1

Let's say that 6.0% is the rate that you are desiring on this day and want to lock the rate for 15 days (this means that you guarantee that the closing will take place within 15 days of this day). If the broker offered a 6.0% rate, he/she is entitled to a rebate from the bank of 0.548% of the loan amount in exchange for doing so. That amount is $822.00 ($150,000.00 x 0.548% = $822). Most ethical mortgage brokers will want to make about $2000 for a conventional mortgage. This means that you will most likely have to make up the difference in the form of a broker fee or origination fee (points).

Example #2

Okay, same day different broker. This broker is quoting a rate of 6.875% and suggests that you lock the rate for 30 days. We are focusing on the second red column. This broker will make $5070 in rebates if you take this rate ($150,000.00 x 3.380 = $5070). Not a great deal for you but a payday for the broker.

Example #3

How much the broker will make from the investor on a 45 day lock for offering this rate today? The answer is $0. Actually, the broker owes the investor $3613.50 for giving you this rate. Now we both know that the mortgage broker is not going to reach in their pocket to offer this rate. They would've been out of business the first day they opened shop if that was the case. In fact, the bill is going directly to you AND in addition, you have to come up with an additional $2000 to pay the broker fee as well. Ouch.

Well, by now you have a very fundamental knowledge of how wholesale interest rates work. I will not go into much detail about the "hits" to the rebate for different criteria. "Hits" are penalties for less than ideal loan characteristics. For example: let's say you wanted 100% financing. This lender deducts 1.0 from the rebate unless a borrower puts 5% or more down. Let's say your loan amount is $95,000.00. Well, this investor deducts .50 of the rebate for loans less than $125,000.00. The list can go on and on. Cash out on a refinance is a biggie. Every investor's loan program has its own "hits". Some even have "improvements" or increases in the rebate for certain loan characteristics. Home purchase loans often have this added incentive.

That being said, what rate on a 30 day lock would pay the ethical mortgage broker his $2000 fee? Answer: you tell me.