Here’s the answer I got from my mortgage broker friend about the commissions on option arms: (I changed the name of the party to X, and the name of the company to ABC)
“A lot of brokers rip off the clients on this loan. One of X’s loan officers just closed one last week and made over $20,000 on a $450,000 loan, not uncommon. ABC Co. is a local brokerage notorious for this. The reason so much money is made on these loans is that the lender will pay the broker up to 3% of the loan amount if the broker jacks up the margin on the index to it’s maximum, therefore increasing the actual interestrate on the loan. The borrower is usually not aware of this because it does not affect the monthly payment which is based on a 1% intererest rate. The actual rate the borrower pays is the index plus the margin, which might be, say, 7.0%. The difference between the 1% the borrower pays every month and the payment at 7.0% gets added to the loan amount every month.
Many of these brokers will also charge the borrower 2% (2 points) on top of the 3% they get back from the lender which is not often disclosed. So although the broker might say he is not getting a rebate from the lender, he most likely is.
On regular fixed rate loans it is much harder to do this because people shop the rate, which is directly related to the brokers rebate. On the option arms, people don’t shop the margin, and they should.”