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How do the mortgage brokers on Zillow make money?

I'm really confused about how the mortgage brokers on Zillow actually make money and how I can compare their quotes with a traditional bank.  I am looking for a 30 year loan on $360k mortage/$40k downpayment.  My credit scores are around 800.

I called my credit union and they said it would be around 3.5% with 1% origination fee and no points.  So that's at least $3600 just in origination fees.  I looked at Costco finance and I see 3.5% with "lender fees" of $600 and appraisal fees of $395.  When I get quotes from Zillow, my best option right now is 3.375% rate with $390 appraisal fee + $595 underwriting - $568 rebate = $417 total fees.  Sometimes I see big rebates and only $1 total fees but still the best rate.

What am I missing?  If the Zillow quotes were a higher rate than my credit union I could understand that's how they make up for the big difference in fees.  Or are there third party fees that I'm not taking into account that are included in my credit union's 1% origination charge that are not quoted in the Zillow quotes?  How can Zillow lenders offer rebates and such to get the total fees to almost nothing?  I don't understand how they are making money.

Any rules of thumb on approximate mortgage-related fees I would expect on a $400k home?  
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August 31 2012 - Minneapolis
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Answers (7)

@ Steve, this post is over a year old so when the OP stated 3.5% it was for a 30 year loan.
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September 13 2013

Having worked with both high volume banks and smaller private banks, here is my opinion on this:

The first reason is that volume dictates price. The more volume a lender does, the lower their cost to close each loan. Most of the lenders you find rock bottom rates with and little to no closing costs are running massive volume. For instance, if they fund $100 Million a month in loans they will bundle the loans and sell them in the secondary market for small profit for each loan but a big profit overall. The second reason is the cost to employ their loan officers. If you are a bank, you do not need to hire a licensed loan officer. They can hire whomever can pass a background check regardless of their education of the mortgage industry. This means they can hire telemarketing order takers and pay them much less. Usually it is a flat commission per loan.
 
So, like most everything else, you get what you pay for..... most of the time. If you are only focused on an interest rate and are willing to deal with lack of customer service and accountability, you can pay less and get the lower rate. If you are focused on customer service a loan officer with experience, you can choose a slightly higher rate or closing cost that pays for your peace of mind. 

Of course there is a third option of high rates and no service, but I would avoid that alltogether.


All the best!!

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September 13 2013
No mortgage is the same. Get 3-5 GFE's from different lenders and compare them. 
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September 12 2013
3.5% is for a 5 year adjustable rate mortgage.  All the 30 year fixed loans are at 4.5%.

The best way to compare multiple lenders is to get a good faith estimate from them.  Once they issue it, they are not allowed to change their quote unless a valid change in circumstance arises in the loan process.

Many home buyers find various rates online, only to discover that the advertisement they found cannot be honored for 1 of 1,000 different reasons.
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September 03 2013
Profile picture for Pasadenan
Rates change many times per day, and change every day.  Brokers are now required to have fixed margins with each lender they work with, and that can only be changed about once every month or so.  (Federal Law, related to Frank/Dodds act).

In most cases, there is sufficient margin in the rates and what investors are paying, that the lending institution is covering the broker fees.  In most cases, the rates are rounded to 1/8% increments, so any differences in the cost of the loan and the rounded numbers are either charged as fees or credited toward fees and origination costs.

For a better idea of how the rates have been changing, see the thread:
Rates on the move again

In most cases, fees and rates quoted on the site are honored by those quoting them, but there are some exceptions.  It is very important to screen your loan officer to make sure they will fund on time and not give you any surprises.
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August 31 2012
Profile picture for Erin Lantz
Hi user 4089068,

The reason you're finding lower rates and lower fees on Zillow is that our open marketplace (where all shoppers and lenders can see exactly what all lenders are charging) drives competition between lenders that results in lower costs to borrowers.  

Often, lenders that quote on Zillow are willing to reduce their fees so they can compete effectively in our marketplace and earn a chance at your business.  If you have any questions about a particular quote you received, I'd suggest that you give the lender a call and have them walk you through the quote in more detail.  

Thanks for using Zillow Mortgage Marketplace.  Feel free to email me directly if you have any other questions. Thanks,

Erin
erin@zillow.com
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August 31 2012
There are both simple answers and complicated answers to your question.  First the simple answer:  Like in any industry, each company sets their own profit margins.  So when your credit union is quoting a higher rate than a broker (or a bank, in my case) they may simply require a higher profit margin.  Now the more complicated answer:  Brokers and banks who work with a network of other lenders can shop for the best pricing throughout the country.  Most credit unions rely on their own deposits.  So if a broker finds "cheaper money", in another geographic area, they can offer it at a more aggressive price.

Finally, when you combine cheaper money with a more aggressive pricing model (thinner profit margins), there can be a significant discrepancy--especially when a credit union or small bank is involved.  Simply put, if a reputable lender/broker is offering you the best deal, take it.  If it seems too good to be true, it's OK to ask them how they do it.  Sometimes the answer you get will give you some real insight into the knowledge level and credibility of the lender.  Good luck.   
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August 31 2012
 
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