How to Refinance a Mortgage

Cash out mortgage refinancing is the process of borrowing more than you owe on your existing loan and keeping the difference. For many homeowners cash out refinancing is an affordable alternative to a second mortgage or a home equity line of credit.

Suppose for example you owe $100,000 on a $200,000 mortgage and want $25,000 to make repairs to your home. You could refinance your mortgage for $125,000 and the remaining $25,000 will be paid to you at closing. You can use this money for any reason; many homeowners use the money to make repairs, pay for a child’s education, or even consolidate bills. The advantage of cash out mortgage refinancing is that you will qualify for a lower interest rate because your home is secured by only one loan.

When you borrow against your equity using a second mortgage or home equity line of credit your home is secured by multiple loans which represent a greater risk for the lender. The greater risk you pose, the higher your mortgage rate will be and the more expensive your loan becomes.

Keep in mind that cash out refinancing borrows against your equity by replacing your first mortgage. Home equity lines of credit and second mortgages are an additional loan secured by your home just like your mortgage. If you fall behind on the payments for your home equity loan you could lose your home just as quickly as if you fell behind on your mortgage payments.

If you’re in the process of mortgage refinancing, comparison shopping will only get you so far. Most homeowners that focus their energy on comparison shopping simply end up with the best of the worst loan offers they consider. Here are several tips to help you negotiate for a mortgage rate that does not include Yield Spread Premium when refinancing your mortgage.

What is Yield Spread Premium?

Mortgage companies and brokers are (over) compensated for their work in several ways. There are the origination fees (also called origination points) you pay directly to the mortgage company or broker, plus lender paid compensation that is passed on to you in the form of a higher mortgage rate. Many people think that because this compensation is “lender paid,” it can’t be a bad thing right? That’s where Yield Spread Premium comes into the picture.

When you apply for mortgage refinancing with a mortgage company or broker, the lender behind the loan approves you for a specific, wholesale mortgage rate. Your mortgage broker knows this interest rate; however, they mark it up for a commission. For every quarter percent you agree to overpay your mortgage broker is paid one percent of the loan amount by the lender.

Here’s an example. Suppose you are refinancing your home with a $150,000 mortgage at 6.75%. The broker charges you an origination fee of one percent or $1,500. What your mortgage broker isn’t telling you is that you were approved for a 6.25 % interest rate. Because your mortgage broker marked up your rate the wholesale lender paid them 2% of your loan, or $3,000. In this example the broker walked away with $4,500 and you got stuck paying too much mortgage interest.

Can You Avoid Paying Yield Spread Premium?

Homeowners who learn how to negotiate when comparison shopping for a new mortgage can avoid paying this markup. When you contact local mortgage companies and brokers try and deal with the owner of the firm. Tell this person you understand how Yield Spread Premium works and will not pay it when refinancing. Offer to pay a reasonable origination fee for their services; any honest mortgage broker would agree to these terms. You can learn more about refinancing your mortgage while avoiding costly mistakes with our free video tutorial.

In recent years homeowners had little choice when refinancing their loans beyond the traditional 30 year fixed interest rate mortgage. Today, Adjustable Rate Mortgages offer a variety of choices for every financial situation. Personal finances in the United States are different today than in the past; homeowners move and change jobs much more frequently than before.

Traditional mortgage loans no longer meet the needs of many homeowners. In addition to offering greater flexibility, Adjustable Rate Mortgages offer lower interest rates than their fixed rate counterparts. Here are several reasons for choosing an Adjustable Rate Mortgage when refinancing your home loan.

1. You plan on moving soon.

2. The change in your financial situation is only temporary. Hybrid Adjustable Rate Mortgages offer the savings of and Adjustable Rate Mortgage plus the safety of a fixed rate loan.

3. You’re counting on higher income in the future. If you know a promotion or a better paying job is on the horizon, refinancing with an Adjustable Rate Mortgage could help you bridge your finances until that higher paying job arrives.

4. You’re a real estate investor that fully understands the risk of an Adjustable Rate Mortgage loan. Investors flipping houses benefit from the lower payments offered by Adjustable Rate Mortgages.

If your Adjustable Rate Mortgage is scheduled to reset soon you might consider refinancing before this happens. You have the option of choosing a fixed rate mortgage or another Adjustable Rate Mortgage. Refinancing with this type of loan allows you to take advantage of the introductory period while avoiding higher payments when your loan resets.

If you are considering refinancing your home loan but are unsure if a new mortgage is right for your situation, there are several good reasons for taking the plunge. Many homeowners refinance because they need a lower monthly payment, to borrow against the equity in their home, or to pay less with a lower mortgage rate.

Mortgage Refinancing Can Lower Your Payment

There are several ways to lower your payment amount when refinancing your home loan. Ideally, if you qualify for a lower mortgage rate you will pay less to the lender for your financing and your monthly payment will go down. Many people will tell you not to refinance unless you qualify for a mortgage rate that is two percent lower than your existing loan. This “two percent rule” is complete rubbish; you can determine if refinancing makes sense for your situation you should evaluate the loan on a cost/savings basis.

Start by looking at the total cost of the mortgage, fees, points, and closing costs and divide this amount by how much lower your new payment will be. This will tell you the number of months it will take for you to break even and realize any savings from the new mortgage. Just make sure the mortgage rate you are basing this decision on does not include Yield Spread Premium and you’ll be ahead of 90% when it comes to choosing the perfect mortgage loan.

Theft by Yield Spread Premium

If you’re unfamiliar with Yield Spread Premium, it’s the markup your loan representative adds to your mortgage rate for a commission. Mortgage companies and brokers mark up interest rates because the lender pays them a bonus of one percent of your mortgage amount for every quarter percent they mark up your rate. This bonus is in addition to the origination fees you’re already paying for their services. Fortunately for you, homeowners who learn to recognize this unnecessary markup can avoid paying it.

What happens if you can’t qualify for a lower mortgage rate and still want a lower monthly payment? Is mortgage refinancing still a good idea?

If you are unable to qualify for a lower mortgage rate there are several options for lowering your monthly payment amount. One way to lower your payment is to choose a mortgage with a longer term length. Term length is the amount of time you have to repay the loan. The longer the term length you choose, the more time your payment will be spread over. This results in a lower payment amount; however, you will pay more over the life of your loan in finance charges. Another option for lowering your payment is to choose an interest only mortgage. As the name implies, the payments for this type of mortgage are based only on the amount of interest due in a given month.

Interest only mortgages are a risky option for refinancing; however, homeowners who understand the risks can leverage this type of Adjustable Rate Mortgage to their advantage. You can learn more about refinancing your mortgage while avoiding costly problems with our free mortgage refinancing video tutorial.

Everyone’s seen the television commercials claiming to get mortgage lenders competing for your business. Is refinancing your mortgage using a company with an advertising budget as large as Lending Tree a good idea? The answer to this question will surely surprise you.

Take a look at Lending Tree’s website and you’ll find a link at the bottom of the page called “Licenses and Disclosures.” About halfway down the page in the midst of Lending Tree’s legaleze is a statement required by the Attorney General of Massachusetts in big black type. I’m going to quote a portion for you.

“LendingTree, LLC is not charging you a fee to arrange a mortgage loan from the mortgage Lender. If you choose the traditional LendingTree, LLC path, LendingTree, LLC will be receiving a fee of up to $1,300 from the Lender for arranging this loan. The amount of this fee will be disclosed to you on the Good Faith Estimate you receive from the Lender you select.”

Here’s the problem in plain English. Lending Tree claims they are not charging you a fee for using their site; however, they receive a fee of $1,300 that you have to pay. Hold on a minute, they’re not charging you the fee, but you still have to pay it to them. This type of corporate legal speak is known as a “Computerized Loan Origination Fee.” Are they being honest and up front about this fee? Absolutely not, and this is why the Attorney General of Massachusetts requires this statement in big bold letters as a condition of doing business in that State.

Unfortunately, the problem of Computerized Loan Origination fees is not limited to Lending Tree. Most of the mortgage sites you find on the Internet have absolutely nothing to do with mortgage loans and exist only to collect your personal information so it can be sold to mortgage lenders. There’s nothing wrong with mortgage lead generation until a company like Lending Tree passes their fee on to you. You can learn more about refinancing your mortgage while avoiding costly mistakes like Computerized Loan Origination fees with our free mortgage tutorial.