Pay the broker a fee at closing, or let the lender pay them and take a higher rate

Question

This question comes up constantly and the room splits every time, so it is worth seeing the actual count. When a borrower uses a broker on a residential loan, the broker's compensation can be arranged so the borrower pays it directly at closing as a fee, or so the lender pays it, in which case the cost shows up in the rate instead. Same broker, same work, two places the money can come from. Rough shape of the tradeoff on a $310,000 loan. Borrower-paid might be something like $4,500 to $6,000 out of pocket at the table, with the lowest rate the broker can find. Lender-paid means no line item for the broker in closing costs and a rate maybe a quarter point higher, sometimes more, which on that balance is roughly $50 to $70 a month. The case for paying cash: the rate holds for as long as the loan is held, and a borrower who keeps it fifteen years paid once instead of every month. The case for the higher rate: closing cash is the scarcest thing most buyers have, and a borrower who refinances or sells in five years never paid for the rate they gave up. An investor buying several properties in a year has a real argument for keeping cash in the pocket even at a worse rate, because that cash is the next down payment. Against that, some argue a borrower-paid arrangement is cleaner because the amount paid to the broker is visible and can be compared to another broker's number, where lender-paid compensation is harder to see and harder to shop. No thumb on the scale here. Vote and argue.

raj_mehta14 · Accepted Answer

Here is the arithmetic with real numbers rather than ranges. Take a $310,000 balance, 30-year fixed, and two quotes from the same broker. Option A, the borrower pays $4,200 at closing, rate 6.375. Option B, the lender pays the broker, rate 6.625. Payments come out at $1,934 and $1,985, so $51 a month apart. $4,200 divided by $51 is 82 months. Just under seven years. So the cash option only wins if the borrower keeps that exact loan past year seven, and it wins bigger the longer the hold. Refinance in year four and you have paid $4,200 for four years of $51 savings, about $2,450, and you are out roughly $1,750. The part most people miss is that the breakeven depends on more than time. It depends on what the $4,200 does if you keep it. If that money sits in a savings account, the comparison above is fair. If it is part of a down payment on another property, then you are comparing $51 a month against whatever that property does, and the cash option looks much worse. One caution. Compare the full quotes, never the rate alone. In a case like this Option B often carries a lender fee, say $995, that Option A does not, which moves the breakeven to about 63 months. Brokers rarely hide it. Borrowers stop reading before the end of the page. Ask for both scenarios on paper with every fee on them and do the division yourself.

bmoreno23 · Answer

I'm starting from zero, and the plain fact is I don't have $5,000 spare at a closing table after the down payment and the reserves. The higher rate isn't a choice for me, it's the only door that's open. Which makes me wonder how often this debate is actually a debate versus just describing who has cash.

jessreyes12 · Answer

The question I've been embarrassed to ask: if the lender pays the broker, is the broker's incentive now to put me with whichever lender pays him most rather than whichever one prices best? Or is that specifically prevented somehow? Because that's the thing I actually worry about and nobody explains it.

tonyv88 · Answer

Almost nobody holds a loan as long as they say they will. A roof fails, a partner exits, a better rate appears, and the loan is gone years before the model said it would be. The breakeven month is the number to see before touching the cash option, and it should be written down rather than estimated in the room.

samantha_ruiz · Answer

As someone buying more than one property a year, cash at close is worth more to me than basis points. $5,000 saved on this closing is a meaningful chunk of the next down payment, and my average hold on financing is under four years anyway because I keep repositioning. Different answer entirely for someone buying a house to live in for twenty years.

Rena Guide · Answer

Two terms to make @angela_burke's setup easier to follow.

Borrower-paid compensation means the broker's fee appears as a line item you pay at closing. Lender-paid compensation, sometimes called lender credit toward broker comp, means the lender pays the broker and recovers it by pricing your loan slightly higher. Lenders publish rate sheets where a higher rate carries more credit back, so the money is real either way and only the route changes.

On @jessreyes12's question, that steering concern is exactly why federal rules were written around loan originator compensation on consumer mortgages, generally restricting compensation from varying based on loan terms and limiting being paid by both sides on the same transaction. How those rules apply to a specific loan depends on whether it is consumer or business purpose, and business-purpose investor lending sits under a different set of rules, so ask your broker in writing how they are compensated on your particular loan and get their answer before you sign.

The arithmetic you can do yourself. Take the fee you would pay at closing, divide it by the monthly payment difference between the two rates, and you get the number of months it takes to break even. Compare that to how long you honestly expect to keep this loan, which is usually shorter than people plan. Also ask whether the fee is refundable if the loan does not close, since that varies by broker and should be in the agreement rather than a conversation.

nataliehsu · Answer

@tonyv88 put it best. It's a breakeven calculation with one unknown, which is your own hold period, and you're the only one who can guess at that.

derekj19 · Answer

@raj_mehta14 that $995 is the part I would have missed. The two options aren't clean versions of each other, they're two whole quotes that differ in more than one place.

dmitri_248 · Answer

The document argument matters more than the math here. A borrower paid fee is a number on a page that a borrower can take to a second broker and say match this. Compensation baked into a rate is much harder to compare across brokers, because it is mixed in with the lender's own pricing and there is no clean way to tell how much of the quarter point is the broker and how much is the lender. The version you can audit is the better one.

kevin_lombard · Answer

Reading @raj_mehta14's numbers twice and it finally clicked. Thank you for showing the division.

mitchell_ray4 · Answer

Coming from the trades, this is the same argument as paying for a better compressor up front versus renting one every job. Depends entirely on how many jobs you plan to do, and everyone overestimates that.

Pay the broker a fee at closing, or let the lender pay them and take a higher rate

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