How to Refinance a Mortgage

Mortgage brokers can be useful resources for refinancing your mortgage if you fully understand what you’re getting into in advance. Brokers are compensated by the origination fees you pay for your loan and often by marking up your mortgage interest rate for a kickback by the wholesale lender. This markup of your mortgage rate is called Yield Spread Premium and if you elect to refinance with a mortgage broker your number one priority needs to be avoiding this unnecessary markup.

Mortgage lenders reward mortgage brokers for marking up your mortgage interest rate by paying them one point (one point is 1% of your loan amount) for each .25% they convince you to pay above the mortgage rate you were qualified. Can you see how this markup has the potential to be abused? You’re already paying in excess of 1.5% of the loan amount to the broker in origination fees for the broker’s services.

Can you avoid paying Yield Spread Premium when working with a mortgage broker? You can if you’re upfront with the broker about the fees that you will pay. When shopping for a mortgage broker you need to tell them that you will pay a reasonable origination fee for their services but will not pay their markup of your mortgage interest rate. A reasonable origination fee is 1.5% of your loan amount. Tell the broker you will pay all necessary third party settlement charges but will not pay Yield Spread Premium. When you have a broker that agrees to your terms, and there are honest mortgage brokers out there, you will have taken the first step to avoiding the costly mistakes other homeowners make when refinancing their mortgages.

You can learn more about working with a mortgage broker without paying unnecessary mortgage interest or junk fees with a free mortgage tutorial.

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If you are a homeowner who purchased your home with an Adjustable Rate Mortgage, you might wonder why your mortgage lender adjusts your interest rate based on the LIBOR index. What exactly is the LIBOR index? LIBOR stands for the London InterBank Offered Rate and is pronounced LIE-bore. The index is based on interest rates used by banks in London. Bank rates in London?! Why is my mortgage based on British interest rates?

Mortgage lenders in the United States like to use the LIBOR index for Adjustable Rate Mortgages because they frequently sell their loans to investors in the United Kingdom and Europe. European investors favor European financial indexes and mortgage lenders make more money offloading your loan overseas.

Should you be concerned that your Adjustable Rate Mortgage is tied to the LIBOR index? There isn’t really one index that’s better than any of the others when it comes to Adjustable Rate Mortgages. If you’re concerned that your mortgage lender will sell your loan overseas, consider choosing a mortgage based on one of the Treasury indexes. While some indexes can be more volatile than others you should concentrate on choosing a mortgage with the lowest margin instead of worrying about the index. Margin is the amount your lender marks up the index when adjusting your payments and directly affects your pocketbook.

You can learn more about your Adjustable Rate Mortgage options, including costly mistakes to avoid with a free mortgage tutorial.

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If you are a homeowner who is considering mortgage refinancing, there are a number of costly mistakes that result in overpaying thousands of dollars for your new loan. Doing your homework and researching mortgage lenders will help you avoid 90% of the costly mistakes homeowners make. Here are five costly mistakes you need to avoid to help you on the right path to the perfect mortgage.

I. Not Understanding Mortgage Fees & Retail Markup

It is important to understand how retail mortgage companies and brokers make their money before shopping for a mortgage loan. Remember that mortgage loans are retail products just like automobiles, and just like a car dealer, your mortgage company marks up their products before selling them to you. When you shop for a car if you know the wholesale price of that car you are much better off when negotiating with the dealer over price. The same is true of mortgage interest rates. Find out the wholesale mortgage rate you qualified for and you can avoid paying the mortgage company or broker markup and save yourself thousands of dollars in unnecessary mortgage interest. This retail markup of your mortgage interest rate is called Yield Spread Premium and your number one priority when refinancing your mortgage needs to be avoiding it.

II. Neglecting to Shop Around for the Best Mortgage Offer

Many homeowners jump of the first favorable offer they are approved for without comparing lender fees and closing costs. Mortgage offers are often loaded with junk fees that you can avoid paying if you do your homework, recognize the fee as garbage, and refuse to pay it.

III. Choosing Adjustable Rate Mortgages for The Wrong Reasons

Adjustable Rate Mortgages can save you a lot of money if you use them properly. Many homeowners choose adjustable rate mortgages because they qualify for higher loan amounts. These loans allow them to purchase bigger homes than they would be able to with a fixed rate mortgage. The problem comes when the mortgage lender begins adjusting the interest rate and the payments skyrocket. Many homeowners find they can no longer afford their payments when this happens and risk losing their homes.

IV. Choosing a Mortgage Loan Based on the Interest Rate Alone

The mortgage rate is just one factor to consider when choosing a mortgage. If you neglect to consider loan terms and closing costs you could find that low mortgage rate costing you thousands of dollars in unnecessary fees and penalties.

V. Not Comparison Shopping With The Good Faith Estimate

Many financial advisors recommend that homeowners use the Annual Percentage Rate when comparison shopping for a new mortgage. The Annual Percentage Rate, or APR, is supposed to give you an idea of the total cost of a mortgage loan expressed as a percentage of the loan amount paid each year. The APR is a good starting point for choosing a mortgage; however, it does not give you enough information to make an informed decision as to which mortgage is best for your financial situation. Always use the Good Faith Estimate to perform a line-by-line comparison of mortgage offers before making a decision.

You can learn more about your mortgage refinancing options, including other costly mistakes you need to avoid with the free mortgage video tutorial found on the top of this page.

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Forbes recently ranked their list of top mortgage companies. Surprisingly, they’re nearly all banks. As you know from watching my mortgage tutorial, banks are exempt from the Real Estate Settlement Procedures Act and do not have your best interests at heart when refinancing your mortgage. Banks routinely add Service Release Premium to their mortgage interest rates and are not required to disclose this markup. If you refinance your mortgage with a Bank the only ones who will know how much your mortgage interest rate has been marked up is your Bank.

Here’s the Forbes list of top five mortgage lenders in the United States.

1. Citigroup
2. Bank of America
3. Wells Fargo Bank
4. Wachovia Bank
5. BB&T Bank

Take this list from Forbes with a grain of salt. The best mortgage company for you is the one that delivers your mortgage when you need it without unnecessarily marking up your mortgage interest rate and provides you with favorable terms on the loan. If you’re not already comparison shopping for lenders and brokers that agree not to charge you Yield Spread Premium on you’re mortgage rate, you’re already paying too much. Yield Spread Premium is the markup of your mortgage interest rate by the broker or mortgage company and if you agree to pay it you will pay thousands of dollars in unnecessary finance charges.

You can learn more about finding the perfect mortgage with my free mortgage video tutorial.

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When it comes to mortgage interest rates, you have two basic choices, adjustable and fixed. There are several good reasons for choosing a fixed interest rate when mortgage refinancing. Here are several tips to help you decide if a fixed interest rate mortgage is right for you.

When the current fixed mortgage rates are low compared to the previous two or three years, fixed rate mortgages are a good idea. Choosing a fixed rate mortgage locks in your payment amount and interest rate for the remaining term of the loan. Mortgage interest rates change frequently and over the last quarter century mortgage rates have been as high as 19 percent and as low as 5 percent. If you lock in your mortgage rate too high you’ll spend more for your mortgage unnecessarily. When interest rates are historically low is the best time to lock in your mortgage rate.

Fixed interest rate mortgages are ideal for homeowners that want to avoid the risks associated with Adjustable Rate Mortgage loans. If you’re not the gambling type, fixed rate mortgages never go up. While Adjustable Rate Mortgages start out low, they can go up quickly when your lender adjusts your loan. If you want to know what your payment will be ten, fifteen, or twenty years from now, choosing a fixed rate mortgage could give you peace of mind.

You can learn more about your mortgage options, including costly mistakes to avoid with your mortgage interest rate by registering for a free mortgage tutorial.

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