How Do Mortgage Companies Make a Profit?

Video Transcript

"Hi my name is Matthew McKillen with Innovative Financial Group, the question posed to me today is how do mortgage companies make a profit. Well generally mortgage companies when they fund mortgages, what they do is aside from the fees they generate on the front end of the loan, it maybe due to points being paid to buy down rate. Their underwriting fees, document prep fees, there is a lot of miscellaneous what I call junk fees, those are all profits for a mortgage company. But the main basis where they make good profit is that they may take a pool of about thirty loans, that could total up to maybe two or three million dollars. And what they do with those mortgages is they turn around and sell them on the secondary market. That means that they will pull them up, take them to Wall Street, and then there's investment companies out there that will actually purchase those loans, because they want to have a nice stream of interest on the money that they are investing in those mortgages. But when they do purchase those loans, generally the mortgage company makes anywhere from one percent to three percent in what's called a service release premium. That's where they basically are allowing this investor to come in and purchase these mortgages and then they get paid a fee for that. So what the mortgage company does then is they take the money they have just been paid back that they lent out on all those loans, plus a two to three percent profit, and they turn around and start the process again. Again my name is Matthew McKillen, I'm with Innovative Financial Group."