If you are applying for a mortgage and working with a commissioned loan officer, it is important to know how your agent is being compensated. As noted in our article of "How much a mortgage agent makes on a loan" , a loan officer can receive compensation on both front end and back end points. With any charges up front, the borrower can clearly see what loan officer is making, however how much a loan officer is making on the back end can remain a mystery.

When the bottom fell out of the mortgage market, mortgage professionals were largely blamed for the destrcution. We've all heard stories of the couple unknowling put into an ARM loan, only to have their payments go up to the point where they were unable to afford to live in the house any longer.    

Standard ARM loans(2, 3, and 5 yr)

Someone not in the mortgage business might assume that they loan officer is heavily incented to put people into ARM loans, and this is the reason these types of loans became so prevelant. One may find it surprising then, that on a standard 2 or 3 yr ARM, the loan officer stands to make significantly less on the back of the loan, over a comparable 30 yr fixed. The reason is simple, the bank paying out YSP/Back End is likely to make far less on an ARM loan over its life, as most people refinance out of them after a few yrs, or once they start to adjust.

While most of the blame for the prevelance of ARM loans is put on mortgage professionals, undertand that they are less incented to put their borrower in this type of loan than in a fixed loan. Borrower's looking to buy as much home as they could afford, or looking to make a quick profit off of a flip, where ultimately the ones that made the ARM loan so popular.

Usually the max available commission on a standard adjustable mortgage is around 2 points(2%percent) .

Fixed Rate Loans (15, 20, and 30 yr)

While your adjustable loans are getting all of the media's abuse, the standard 30 or 15 yr fixed loans have remained relatively unschathed. With good reason. The borrower knows exactly what their payment is and there are never any surprises. What many people would be surprised to hear is that fixed loans pay the loan officer's more than comparable ARM loans.

The reason for fixed loans paying more than ARM loans is fairly simple. The wholesale bank funding the loan is the one that shells out the commission, and the more they stand to make in interest over the life of the loan, the more they are willing to pay the loan officer. With people far more likely to stay in there fixed loan over there ARM loan, the bank stands to make far more interest, thus they are happy to pay the loan officer a nice chunk of change.

Loan officers can make up to 4 or even 5 points in a fixed rate loan. For this reason, borrowers should be very wary of no up front fee loans, as it means loan officers are most likely putting you into a higher than market rate.

Option ARM/Pic a Pay Loans

The Option ARM or pic a pay loan has probably received the most critisism of any loan on the market. In fact, these types of loans have become almost non existant in the aftermath of the mortgage decline.  Now unlike standars ARM loans, loan officers are heavily incented to put someone into an Option ARM. Most people choose the option ARM, for one option only, the minimum payment and they fail to pay attention to the margin that is used to calculate the interest rate on the loan.  The loan officers are incented to give the buyer the highest margin possible. The hugher the margin the more the more Loan Officer makes.

Loan officers average about 3 points on the back of an  Option ARM and can make as many as for and 5