A discount mortgage broker is one who claims that the lender is paying his or her fees. These mortgage brokers shop for competitive loan deals on the behalf of consumers looking for mortgages. Upfront mortgage brokers by contrast are ones that spell out exactly the fees they will receive from the borrower. Their charges are part of the closing costs of the loan.
The phrase discount mortgage broker gives the connotation that the individual is offering services for a reduced price. This is usually the opposite of what they do. Discount brokers usually charge higher fees. The borrower is not able to recognize this much of the time because the fees are buried in the higher interest rate which he or she will pay over the life of the loan. When the borrower pays in the rate, the payment becomes extended over years instead of a single upfront fee.
Lenders do not ever truly pay the fees of mortgage brokers. Borrowers always front them in one of two ways. With upfront brokers, the borrower pays the costs upfront in cash when it is time for the mortgage loan to close. This makes the fee for the broker a part of the closing costs.
The other way is for the borrower to pay a higher rate of interest to the lender. The lender then covers the broker cost during the closing in exchange for the higher interest rate. This means that the fee would not be a closing cost for the borrower. The borrower is still paying the fee. He or she is paying it instead each month of the loan in the form of a higher mortgage payment.
A discount mortgage broker prefers to have the fee paid by the lender in the closing. The reason for this is that resistance from the borrower to the fees is considerably less when the borrower does not understand the way it works. Consumers are usually extremely focused on the cash which they must come up with at closing than they are on payments they will make in the future.
The disclosure forms which are required do not clearly spell out rebates that the broker receives. The home buyers know all too well how much these fees are when they pay it personally at closing. They often have little idea of how much the broker is charging and receiving when they pay it from the interest rate.
This is why a discount mortgage broker is always looking to receive its compensation completely in the form of rebates from the lender. There is nothing illegal or unethical when borrowers pay their brokers via a higher interest rate in lieu of a cash payment. Transparency would argue that a home buyer should at least be able to make the choice intentionally.
Some borrowers can actually benefit from paying the discount mortgage broker through the rate and rebate. In the cases where the home buyers will not pay this greater rate for too long, then it can save them money over the upfront out of pocket mortgage broker fees. For individuals who will keep their mortgage a greater amount of time, it saves them money to pay the broker directly at closing. This is provided they have the cash available.