How to Refinance a Mortgage

Yield Spread Premium is one of the least known, yet expensive mistakes homeowners make when refinancing a mortgage loan. Most homeowners have never heard of Yield Spread Premium, and if you agree to pay this markup of your mortgage interest rate when refinancing you will spend thousands of dollars unnecessarily.

So what is Yield Spread Premium? Assuming that you are not refinancing with a Bank (we’ll talk about Bank originated mortgages later), Yield Spread Premium is the markup of your mortgage interest rate by the person originating your loan for a higher commission. Here’s how this markup works.

Mortgage loans are retail products; with the exception of bank originated mortgage loans there is always a wholesale lender behind your mortgage. When this wholesale mortgage lender approved you for mortgage refinancing, you are approved for a specific wholesale mortgage interest rate. This rate was provided to your loan originator, be it your mortgage company or broker. This person marks up the interest rate you were approved because the wholesale lender pays them a bonus for charging you more.

That’s right, for every quarter point you agree to pay over the mortgage rate you qualified, this person receives a bonus of one percent of your loan amount. This bonus is in addition to the fees you’re already paying for the application and loan origination. If you unknowingly agree to pay this markup you are effectively paying this person double for the work they do in addition to overpaying thousands of dollars for your new mortgage.

What about Bank mortgage loans?

There’s no wholesale lender with a Bank, aren’t you better of refinancing your mortgage through your Bank? While it’s true that Bank originated mortgages are a convenient way to refinance your mortgage, Bank loans are not exempt from mortgage yield spread. When a Bank marks up the wholesale mortgage rate you would have qualified it simply has a different name. Banks mark up mortgage interest rates to boost their profit when your loan is sold to investors on the secondary market. When this markup is done by a bank it is called Service Release Premium and due to a loophole in the Real Estate Settlement Procedures Act, the Bank is not required to disclose that they are marking up your mortgage interest rate. It is because of this loophole that you should never refinance your mortgage with a Bank.

I. Loan to Value Ratio (LTV)

Your loan to value ratio is determined by dividing the amount of the mortgage you are requesting by the appraised value of your home. Suppose you are borrowing 100,000 to refinance your home appraised at $175,000; your loan to value ratio (LTV) in this case ($100,000 / $175,000 x 100) is 57%. The lower your loan to value ratio, the better your mortgage interest rate will be. If your LTV is above 80% you will have a harder time qualifying and will pay a higher mortgage interest rate.

II. Yield Spread Premium (YSP)

Yield Spread Premium is the number one culprit when it comes to homeowners overpaying for their mortgage loans. This hidden markup of your mortgage interest rate results in spending thousands of dollars unnecessarily. Your mortgage interest rate is marked up by the person originating your loan because the wholesale lender pays them a bonus of 1% of your loan amount for every quarter percent they get you to pay over the interest rate you were approved. Fortunately, there are ways to recognize and avoid Yield Spread Premium when mortgage refinancing. To learn more about avoiding this unnecessary markup of your mortgage interest rate, register for the free video tutorial available on this site.

III. Debt to Income Ratio (DIR)

Your debt to income ratio is important factor in determining the mortgage interest rate you will qualify. To calculate your debt to income ratio, simply divide your monthly bills by your total gross income for the month. Mortgage lenders like to see this around 50%; however some lenders will go higher with a premium mortgage rate. The lower your debt to income ratio, the better off you will be. Before applying to refinance your mortgage you should focus on paying down the balances on credit cards and making all of your payments on time. This will improve not only your qualifying ratios, but your raise your credit score as well.

If you are the in the process of refinancing your home mortgage loan, doing your homework before applying for a new mortgage will help you avoid costly mistakes. There are number ways to overpay for a new mortgage loan; the most common is unknowingly paying Yield Spread Premium with your mortgage interest rate. Yield Spread Premium is the retail markup of your mortgage interest rate by the Mortgage Company or broker originating your loan.

Your Mortgage Makeover – Avoid Yield Spread Premium

Yield Spread Premium Results in paying thousands of dollars in unnecessary interest and only serves to boost the commission of your loan originator. Another garbage fee you need to be aware of when refinancing is the computerized loan origination fee charged by many mortgage sites on the Internet. This is a fee paid to these websites for collecting your contact information. One well known mortgage site charges as much as $1,300 for their part in “facilitating” your mortgage loan. You can avoid these computerized loan origination fees by carefully reading the licenses and disclosure statements found on the mortgage site before entering your contact information.

Your Mortgage Makeover – Comparison Shop with the Good Faith Estimate

Comparison shopping with the Good Faith Estimate will provide you a better picture as to which loan offer is best suited to your needs. Many people tell you to use the Annual Percentage Rate or APR when shopping for a mortgage; however, the APR does not give you enough information to make an informed decision as to which loan is best for you. You can learn more about your mortgage options, including expensive mistakes to avoid with our free mortgage makeover video tutorial.

If you’re considering refinancing your mortgage in the State of Colorado, finding the right person to originate your mortgage loan can save you thousands of dollars and many future headaches. Robert Blake is a licensed mortgage broker in the State of Colorado and is fairly outspoken against Yield Spread Premium and bank mortgage loans on his Blog “The Mortgage Insider.”

If you’ve watched the free video tutorial available on this site, you know that Yield Spread Premium is the unnecessary markup of your mortgage interest rate by the loan originator to boost their commission. This markup could be subtle, as little as a quarter percent; however, if you unknowingly agree to pay it you’ll spend thousands of dollars in unnecessary mortgage interest. As for banks, bank originated mortgage loans are just plain evil. Banks mark up their mortgage interest rates to make a profit by selling your loan on the secondary market and are not legally required to tell you that they’re doing this.

If you’re in the market for a new mortgage loan in Colorado, a good mortgage broker can be an excellent resource for securing loan offers you might not find shopping on your own. Finding an honest mortgage broker can be a difficult task as these individuals are almost always paid by commission. The mortgage that gives them the largest commission may not be the best loan for your situation; this is why it is important to do your homework before refinancing your mortgage.

So if you’re refinancing your mortgage in Colorado, check out Robert Blake’s mortgage Blog “The Mortgage Insider,” and tell him you won’t stand for Yield Spread Premium.

Mortgage Brokers can be an excellent resource for mortgage refinancing if you find the right broker to work with. Before entering into an agreement with a broker there are several important questions you need to have answered.

The first thing you need to make clear to any potential mortgage broker is that you fully understand how Yield Spread Premium works, know how to find it in your mortgage, and simply won’t stand for it in your mortgage interest rate. If you’re new to RefiAdvisor, this site focuses on educating homeowners about the hidden markup of their mortgage interest rate that serves only to boost the commission of the individual that originated the loan.

In a nutshell, when your loan application was approved, you qualified for a specific mortgage interest rate. Your loan officer marked this rate up because the wholesale lender pays them a bonus of one percent of your mortgage amount for every quarter percent they mark up the mortgage rate. The difference between the mortgage rate you qualified and the rate you locked and closed is Yield Spread premium.

When negotiating with potential mortgage brokers the first thing you want to tell them is that you will not accept a mortgage that includes Yield Spread Premium. Tell the broker you will pay a reasonable origination fee for their services. A reasonable origination fee is 1% of your loan amount. Ask the broker to see the Good Faith Estimate before submitting your application and the rate lock from the wholesale lender once your application is accepted. You will be able to spot any Yield Spread Premium on the lock confirmation from the wholesale lender.

An honest mortgage broker will agree to these terms and you will save yourself thousands of dollars and many headaches. Lastly, when you negotiate with potential mortgage brokers try and deal with the owner of the firm in question. Loan representatives may not be able to broker a deal with these terms so it’s best to start from the top. You can learn more about refinancing your mortgage without overpaying with my free video tutorial.