How to Refinance a Mortgage

If you are in the process of refinancing your home and are searching for information about mortgage rates there are several things you need to know about the rate quotes you receive. Most homeowners don’t realize that 90% of the rate quotes they receive from mortgage brokers and on the Internet include commission based markup included to make someone money from your loan. Understanding mortgage quotes and learning to recognize this markup will help you avoid paying too much for your next mortgage loan.

Today’s 30 Year Fixed Rate

The 30 year fixed mortgage rate has been creeping up slightly to 6.0%. This rate does include Yield Spread Premium which is intended to give a commission to the person arranging your loan. Yield Spread Premium by itself is not necessarily a bad thing; only when it is abused could you wind up paying hundreds of dollars a month unnecessarily.

What is Yield Spread Premium?

Yield Spread Premium is a percentage of your loan amount created when the mortgage company or broker arranging your loan locks and closes with a higher than market interest rate. Suppose your lender approves you for a mortgage rate of 6.0% but the broker closes you at a higher rate of 6.5%. This creates .5% of Yield Spread Premium and brings the broker a commission of 2% of your loan amount. Did your mortgage broker overcharge you? It depends on how your loan was structured and whether or not the broker told you they were marking up your mortgage rate.

Mortgage Broker Compensation

Brokers are compensated in two ways. They can charge you an origination fee for their part in arranging your loan or receive compensation from the lender with Yield Spread Premium. If the broker is charging you an origination fee for their services a reasonable fee to pay is 1-1.5% of your loan amount. Mortgage brokers typically receive one percent of your loan amount for every .25% your loan closes about the interest rate offered by the lender. If this is paid in lieu of an origination fee or used to pay your closing costs Yield Spread Premium can be a good thing; however, it is often abused when the broker charges you an origination fee and pockets Yield Spread Premium without your knowledge.

You can learn more about refinancing your home loan without paying too much in broker fees including ways to recognize and avoid lender junk fees by registering for my free video tutorial.

If you’re in the market for a new mortgage and are searching for lower mortgage rates, there are several things you need to know about the rate quotes you receive. Many homeowners think that comparing offers from several different lenders is all they need to get the best deal; however, what most people don’t understand is that they are simply comparing retail mortgage rates with the same markup. If you really want lower mortgage rates you’ll need to find someone willing to offer you wholesale rates without paying garbage fees. Here are several tips to help you refinance your mortgage with a wholesale mortgage rate and save thousands of dollars in the process.

What Are Wholesale Mortgage Rates?

Wholesale mortgage rates are offered by a certain type of mortgage lender that does not do business with the public directly. These wholesale mortgage lenders offer their best rates to mortgage brokers and other retail mortgage companies that sell loans to the public for a commission. Many people think that by contacting one of these lenders directly they can refinance with a wholesale rate; however, wholesale lenders have retail branches that deal with the public and do not offer wholesale mortgage rates. In order to refinance your loan with a wholesale rate you’ll need to enlist the help of an honest mortgage broker willing to give you access to these rates.

Mortgage Brokers Work For a Commission

The problem with refinancing your home loan with a mortgage broker comes from the way that brokers are compensated. Mortgage brokers are paid for their services in two ways. Most brokers charge you an origination fee for their services. This fee could be one percent or more of your loan amount; however, one percent is a reasonable amount to pay for your mortgage broker’s services. The second method your broker receives compensation is from kickbacks the lender pays for overcharging you with your mortgage interest rate. Many brokers mark up the mortgage rate you qualified because lenders pay a commission of one percent for every .25% they overcharge you. This commission is called Yield Spread Premium and is the reason that most homeowners overpay when refinancing their mortgage loans.

Yield Spread Premium Can Be Avoided When Refinancing

Most brokers get defensive or even angry when questioned about Yield Spread Premium. And why wouldn’t they? This markup of your mortgage interest rate can double, even triple their commission on your loan. You can avoid paying a higher mortgage rate with Yield Spread Premium by finding a mortgage broker willing to work for the origination fee alone, without this kickback from the mortgage lender.

Shop Around For Honest Mortgage Brokers

You can start your search for an honest broker to refinance your mortgage by searching the Internet for an “Upfront Mortgage Broker” in your state. Upfront mortgage brokers charge a flat fee for loan origination without charging Yield Spread Premium on your loan. The Upfront Mortgage Broker’s Association maintains a registry of brokers on their website upfrontmortgagebrokers.org that is categorized by State.

If there are no members in your State you can find the right broker by contacting mortgage brokers found in the phone book. Start by telling these brokers that you understand Yield Spread Premium and will not accept any loan offers that include this markup.

It is usually easier to negotiate this type of deal with a mortgage broker that has their own business as those working for a large brokerage firm may not have the authority to give you the deal you are looking for. You can learn more about finding the right kind of mortgage broker to refinance your home loan without paying Yield Spread Premium and other garbage fees by requesting a free mortgage refinancing DVD.

If you used an adjustable rate mortgage to purchase your home or are considering refinancing your existing loan with an Adjustable Rate Mortgage, there are several things you need to know to protect yourself from economic uncertainty. Many homeowners view Adjustable Rate Mortgages as an unnecessary financial risk and avoid them completely. Here are several tips to help you make an informed decision as to which type of loan is right for you before refinancing your home mortgage.

While it’s true that no one can predict or control mortgage interest rates there are steps you can take to protect yourself from uncertain times. This is true if you already have a mortgage with an adjustable interest rate or need to refinance with one to get the lowest possible payment amount.

Many homeowners initially choose Adjustable Rate Mortgages because they need the lowest possible payment. Problems generally arise when the lender begins resetting the loan and the interest rate and payment amount go up. When using an Adjustable Rate Mortgage you always run the risk of payment shock after your loan resets. Payment shock is the risk of waking up one day to find that your loan has reset and the new payment amount is now several hundred dollars higher.

If you are concerned that payment shock could happen with your existing Adjustable Rate Mortgage or the new loan you are considering, there are steps you can take to protect yourself. This allows you to take advantage of the lower introductory mortgage rate while limiting your risk of experiencing payment shock.

Understanding Teaser Rates

Teaser mortgage rates are frequently used as a marketing tactic to attract borrowers. While teaser rates are not necessarily a bad thing as long as you know what you’re getting yourself into, it is important to understand that the teaser rate is not your contract rate. Your contract mortgage rate is the initial interest rate your loan is based on once the teaser expires. When the teaser expires your payment will go up based on this contract interest rate.

Some teaser rates are only valid for 30 or 60 days while others may last for as long as six months. Homeowners who don’t understand how teasers work often find themselves in trouble when the lender resets their loans to this contract mortgage rate. After your teaser expires your loan should remain at the initial contracted rate until your first regularly scheduled reset.

Protecting Yourself When Refinancing

Hybrid Adjustable Rate Mortgages are a special type of mortgage loan that combines the savings of an adjustable rate loan with the stability of a fixed rate mortgage. Hybrid mortgages offer an initial fixed rate period that lasts anywhere from three to ten years and may include an unusually low teaser rate. During this initial period your mortgage rate remains fixed and the payment will not go up. Mortgage rates on hybrid loans are typically lower than traditional 30-year, fixed rate loans without the risk of a standard, Adjustable Rate Mortgage loan.

Homeowners who financed their homes with ultra risky interest-only or option Adjustable Rate Mortgages can take advantage of the Hybrid loan’s fixed rate period to avoid their lenders reset without taking a large jump in their payment amount refinancing with a conventional fixed-rate mortgage loan.

Are All Indexes Created Equal?

Many homeowners obsess over the index their Adjustable Rate Mortgage is based. Every Adjustable Rate Mortgage and Hybrid loan is tied to a financial index that the mortgage interest rate is based on. While it is true that some indexes can experience more volatility than others there isn’t necessarily one index that is better than the others. Common indexes include the Treasure one, two, and three year indexes, the Bank Prime Rate, and the LIBOR (London Inter-Bank Offered Rate).

Many homeowners are surprised to find their mortgages tied to the LIBOR Index; however, the LIBOR is popular because many lenders that sell their loans to European investors. The bottom line when choosing an index for your Adjustable Rate or Hybrid mortgage is that there is no “best” index; you should concentrate on making your decision based on loan terms and interest rates rather than worrying about which index you are getting when shopping for an Adjustable Rate Mortgage.

What About Loan Caps?

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If you are considering mortgage refinancing it is well worth your time to review your credit before you contact lenders. Your credit scores influences not only the type of mortgage products you will qualify, but how much each loan will cost you. Before applying for a new mortgage it is important to review your credit records for errors…this will save you a good deal of time and frustration down the road. Here are the basics you’ll need to know about your credit score before refinancing your home mortgage loan.

What Are credit scores?

Your credit score is one of the major factors determining the type and amount of mortgage you will qualify when refinancing. Your credit score is a snapshot of the contents of your credit reports and is intended to provide a numerical estimate of your ability to manage personal finances. Your credit score is based on the following aspects of your credit reports:

1. Your history of making on-time payments.
2. How much available credit you have.
3. Reports made by your creditors.
4. Negative information including judgments, leans, or bankruptcy.

Keep in mind that because you have three credit reports you’ll have three corresponding credit scores. Credit records are maintained by three for-profit companies: Equifax, Experian, and Trans Union. These credit bureaus use complicated and secretive algorithms for distilling the contents of your credit files into a numerical representation of your likelihood to repay your mortgage in a timely manner. Credit scores range from 300 to 850; the higher your credit score the less you’ll pay for refinancing your mortgage loan.

How Are Credit Scores Calculated?

Understanding how your credit score is calculated is the first step to improving your credit and qualifying for the best mortgage rate possible. If your credit score needs improvement concentrating on the following areas will allow you to make the most significant improvements in the least amount of time.

35 Percent of your credit score is based on your history of making payments on time. Making all of your payments on time, especially your mortgage payment will have the largest impact on improving your credit score. Even if you make only one late payment prior to applying for a mortgage it could have a significant negative impact on your credit and the mortgage rate you will qualify.

30 Percent of your credit score is based on the amount of outstanding debt you have. The amount of credit you have used measured against your total credit available or the limits on each of the accounts listed on your credit reports represents your available credit. Maxing out your credit cards has a large negative impact on your credit score. Many financial advisors agree that maintaining no less than 25% of your available credit will have the largest favorable impact on your credit score.

15 Percent of your credit score is based on the amount of time that you’ve been using credit. The longer your credit history of favorable reporting, the higher your score will be. Your credit reports are the record of your use of credit so it is important to ensure that your credit records are error free on a yearly basis.

10 Percent of your credit score is based on the number of creditors making inquiries into your credit reports. An inquiry is made before applying for new credit and having too many flags you as a risk to potential lenders. Most inquires made stay in your credit files for a period of one year before dropping off. Because inquires have a negative impact on your credit score it is important to limit them while shopping for a mortgage loan. Accessing your own credit report does not count as an inquiry and does not have a negative impact on your credit score.

10 Percent of your remaining credit score is based on the different types of credit you use. This includes revolving accounts like your credit cards and installment accounts like your car loan and mortgage. Your mortgage payment history is an important aspect of your credit score and you should always strive to make the payments timely.

What Is The Ideal Credit Score?

If you are a homeowner with a credit score below 500 you can still qualify for a mortgage; however, you’re going to pay a lot more and be forced to accept less favorable terms. If your credit score is above 700 you will qualify for the best mortgage programs with the lowest interest rates. You can learn more about improving your credit score prior to refinancing your mortgage with a free video tutorial and wholesale mortgage rate quote.

Mortgage interest rates are a source of confusion for many homeowners. You’ll see rate quotes published on the Internet and advertised on television, but how do you know if those rates apply to you? There are a number of factors that influence the mortgage rate you will qualify including your credit; however, many homeowners are unaware that there is a “dark side” of mortgage rates that could cost you hundreds of dollars every month. Here are the basics you need to understand about mortgage rates and how you can avoid unnecessary markup when purchasing your home or refinancing an existing mortgage.

Factors That Influence Your Mortgage Rate

When you qualify for a mortgage loan there are a number of factors that determine the interest rate you are approved. Some of these factors including the economy, supply-and-demand, and wholesale mortgage rates are outside of your control. Other factors include your credit score, property type, whether or not you live in the home, how much equity you have, and how much of a commission your loan originator is trying to build into your mortgage loan.

Know Your Credit History

Your credit score is an extremely important part of your mortgage rate. credit scores are based on the contents of your credit history and 35% of your score is based on your history of making on time payments. Before you begin shopping for mortgage rates it is extremely important to request a copy of your credit report from each credit agency and carefully review your records for errors. If you find mistakes in your credit reports you will need to dispute the mistake with each credit agency and allow enough time for the correction to be reflected in your credit score.

Paying for your credit reports is not necessary as Congress recently passed a law requiring Equifax, Experian, and Trans Union to provide you a free copy of your credit history once per year. If you want a credit score you will have to pay for your credit score; however, it is not necessary to pay for a credit score as you can receive this from your lender if you want to know your score. Concentrate your efforts on checking your credit history for errors and paying all of your bills on time rather than worrying about what your exact credit score is.

If you have negative information in your credit history such as a write-off or judgment, you can improve your credit score by settling with that creditor. You may be able to pay as little as 30 or 40 cents on the dollar to have this negative information removed; try negotiating with the company responsible for the negative information to pay and have this removed before shopping for mortgage rates.

Mortgage Rate Markup

The dark side of mortgage rates is an unfamiliar subject for most homeowners; so much that the Secretary of Housing and Urban Development recently stated that this markup will cost American homeowners nearly sixteen billion dollars this year alone. This markup of your mortgage rate is called Yield Spread Premium and avoiding it needs to be your number one priority when shopping for mortgage rates.

What is Yield Spread Premium?

The markup you pay on the wholesale or “par” rate that you qualify is called Yield Spread Premium. Your mortgage broker marks up your mortgage rate because the wholesale lender pays them a bonus for overcharging you. For every quarter percent you agree to overpay on the mortgage your broker receives a commission of one percent of the loan amount. This is paid in addition to the origination fees you’re already paying for the broker’s services; Yield Spread Premium allows many brokers to double, even triple their commission on your loan.

Why is Yield Spread Premium Bad?

Mortgage brokers are greedy people…sorry to say it, but it’s true. Many mortgage brokers become defensive, even angry when questioned about Yield Spread Premium. Your broker might tell you: “Don’t worry about the fee; if the lender’s paying it, it’s not coming out of your pocket.” The problem with this argument is not the fact that the commission is being paid, but the reason your lender is paying this fee. Yield Spread Premium is paid because you are accepting a mortgage loan with an above market interest rate. This means you will pay more unnecessarily for your financing every month that you keep this loan.

You Can Get Lower Mortgage Rates

Avoiding Yield Spread Premium allows you to take advantage of wholesale mortgage rates. You’ll need to find a mortgage broker willing to work for an origination fee without charging Yield Spread Premium and this is not a small task. You can start by telling prospective mortgage brokers that you understand Yield Spread Premium and will not accept any mortgage that includes the markup. It is usually best to negotiate with a mortgage broker that is self-employed as mortgage brokers working for a large firm may not have the authority to broker the type of mortgage you’re looking for.

Bank Mortgage Rates Are Not The Answer

You might think that by taking out a mortgage form your bank you’ll avoid all the mortgage rate problems with Yield Spread Premium. While it’s true that banks and other mortgage companies that fund loans with their own money don’t charge Yield Spread Premium, you’ll still get a marked up mortgage rate. Banks charge their customers Service Release Premium in order to profit when your mortgage is sold to investors on the secondary market. Your bank is also exempt from the Real Estate Settlement Procedures Act and is not required to tell you how much they’ve marked up mortgage rates or what their profit margin is on your loan. Why would you want a mortgage from a lender that is not required to play by the rules?

If you’d like more advice about finding the lowest mortgage rates while avoiding expensive pitfalls register for a free mortgage refinancing blueprint. You’ll get a six-part refinancing video series free with no obligation.