Back end fee are 'points' or yield spread paid to the mortgage broker by the lender.

I am sure you have heard of those lenders and mortgage companies that advertise the 'no closing cost' loan. Do you really think they are going to spend their money on advertising so that they can provide you with a free service? They are making back end fees or yield spread from the lender or bank.

You are not paying any fees or closing cost, but you are paying in the long run in interest rates and monthly payments!

This is how it works

'Mortgage points' also known as mortgage loan points or mortgage discount points are percentage points of the loan amount. They are what what makes up the origination fee. Basically when a broker or a lender says they are charging you 1 point, they simply mean 1% of your loan amount. For example if they say they are charging 1 point and the loan amount is $100,000 that means they are charging $1,000.

If a mortgage broker offers a borrower a loan of $100,000 at an interest rate of 6.5%, and the par rate is 6%, the broker may earn a yield spread premium (YSP) equal to 1.0% of the loan amount. This $1,000 fee is paid by the lender directly to the broker as a 'rebate.' The mortgage broker earns 'one point' directly from the lender paid outside closing (POC). Although the borrower is not charged the fee directly, the borrower does pay the fee indirectly by accepting a higher interest rate in exchange for lower fees.

For example; If you have a loan of 200,000 at 6.5% your payment will be $1264/month (Principal & Interest). Compare that to a traditional loan with closing costs of $4000, your new loan at 204,000 at 6% will have a payment of $1220/month.

Generally closing costs on a new loan are tax deductible.

Obviously mortgage broker or mortgage business is not operating or working for free. The question is whether you want to pay higher interest rates or upfront closing costs.

Mortgage Brokers are required to disclose this yield spread or back end fee on the HUD1 settlement statement.