How to Refinance a Mortgage

Points are one of the most misunderstood aspects of mortgage loans. In the simplest definition mortgage points are a percentage of your loan amount due at closing for one of two possible reasons. Here are the basics you need to know about mortgage points and how you can decide if paying them is worthwhile when refinancing your home mortgage loan.

Types of Mortgage Points

Mortgage points come in two flavors. One point is equal to one percent of your mortgage amount and is the fee you’ll be required to pay at closing. There are the discount points you pay to the lender in exchange for a lower mortgage rate and the origination points you pay to the broker for their part in arranging your loan. Brokers and lenders do not always require that points be paid; however, some lenders hide their point requirements in the fine print hoping to distract you with an unnaturally low mortgage rate.

If you don’t agree to pay the points required for that low mortgage rate you’ll find the actual interest rate is often much higher than the going market rate. This is a common bait and switch tactic used by mortgage lenders to boost their profits. Fortunately once you understand how points work this is an easy scam to avoid.

Should You Pay Mortgage Points?

Deciding whether or not paying points to the lender is in your best interest depends on how long it will take you to recoup the expense based on the lower monthly payment you are getting. We’ve all seen the commercials on television promising insanely low rates with a lot of very small print flashed up on your screen. If you pause the commercial and squint you can just make out that this lender requires two points at closing to qualify for this low rate. Does it make sense to pay the fee?

You can easily determine this with a simple mortgage payment calculator. First compare the lower payment with points to the higher payment without points. The difference between the two payments is your monthly savings. Suppose you were refinancing a $200,000 loan with this lender. Two points would amount to $2,000 due at closing. If the monthly payment is $35 lower it will take you almost five years to recoup this expense. If you plan on staying in your home for the long term paying points can be beneficial; however, if you sell your home before this you’ll be losing money by paying points.

What About Origination Points?

Mortgage brokers often charge origination points for their part in arranging your loan. Not every mortgage charges origination points as brokers can receive compensation from the lender behind your loan. If your broker is charging you a fee for arranging your loan a reasonable fee to pay is 1-1.5% of your loan amount. You can learn more about your mortgage refinancing options including costly mistakes to avoid by registering for my free video tutorial.

If you’re like many Florida homeowners refinancing mortgage loans, finding the lowest mortgage rate is your primary concern when refinancing. Getting the lowest possible Florida mortgage rates takes more than just comparison shopping; you’ll need to understand how rate quotes work to get the best deal. Here are several tips to help you find the best mortgage when refinancing your Florida home loan.

Mortgage rate quotes

With the exception of Bank loans, mortgages are retail products resold by mortgage companies and brokers for profit. Mortgage brokers make their profits by charging you a fee and by marking up your mortgage rate. The quotes you receive when shopping for Florida mortgage rates all include markup by the broker to give them a commission.

The commission paid by the mortgage lender is called Yield Spread Premium and avoiding it needs to be your number one priority when refinancing your home. Yield Spread Premium Sounds scary but it’s a relatively simple concept to wrap your head around. When a lender approves your application they are approving you for a certain “wholesale” mortgage rate. Your mortgage broker marks this rate up to get a kickback from the lender…for every quarter percent you agree to overpay the broker gets paid one percent of your mortgage amount.

Florida Mortgage Rates and You

The problem with this commission based markup of your mortgage rate is that it’s never properly disclosed or explained. Yield Spread Premium adds thousands of dollars to your mortgage payment every year that you keep that loan, money you’re paying because the broker took advantage of you. Here’s an example to illustrate Yield Spread Premium and Florida mortgage rates.

Suppose you’re refinancing your Sarasota home for $300,000 with a fixed rate 30 year mortgage. The broker quotes you a mortgage rate of 7%….you’ve had some dings on your credit and need to consolidate your home equity loan so you agree to the loan. Your mortgage payment at 7% interest is $1,995 per month.

What your mortgage broker isn’t telling you is that you actually qualified for a 6.5% mortgage rate and they’ve marked it up to 7% to get a 2% commission from the lender. This commission is paid in addition to the 1% origination fee that they’re charging you. The broker walks away with 3% and you get stuck paying more than you need to…but exactly how much more?

The same loan with a 6.5% mortgage rate has a monthly payment of only $1890! That’s an additional $1,260 you’ll be paying every year just to give your mortgage broker a bonus. Over the next five years this balloons up to $6,300! How many other uses do you have for your own money besides giving it to someone that lied to you?

The good news for the Sarasota Florida homeowner in this example is that Yield Spread Premium can be avoided. By doing your homework you can learn to recognize this unnecessary markup and avoid junk fees in the process. You can learn more about doing this for your home by registering for my free mortgage video tutorial.

If you’re in the process of refinancing your mortgage with a broker, the answer to this question is important if you want to avoid paying too much for your new home loan. The compensation your broker receives for originating your mortgage is not only based on the fee you pay but includes a kickback from the lender based on how much you agree to pay or overpay.

This lender kickback is the reason that American homeowners will overpay sixteen billion dollars for their home loans this year according to the Secretary of Housing and Urban Development. Here is an explanation of how your broker is paid and what you can do to avoid paying too much for your next mortgage loan.

Origination Points

The first method your mortgage broker is paid for their services is by charging you a fee. This fee is often called “origination points” or an “origination fee.” One point is the equivalent of one percent of your mortgage amount due at closing. How much is reasonable to pay for loan origination? In most cases you should not agree to pay the broker more than one percent for mortgage origination. Any more than one percent and your mortgage broker is taking advantage of you with this fee.

Yield Spread Premium

The second method of mortgage broker compensation that I’ll discuss today is called Yield Spread Premium. This is a fee, also called a P.O.C. charge (Paid Outside of Closing Fee) paid by the lender. You might be asking “If this fee is paid by the mortgage lender, why should I care about it.” The problem with Yield Spread Premium doesn’t come from the fact that your lender is paying the broker a fee, but why this fee is being paid in the first place. Mortgage brokers receive Yield Spread Premium as an incentive for closing loans with above market mortgage rates.

Mortgage Yield Spread Premium is a commission paid to your mortgage broker for overcharging you. That’s right…for every quarter percent you agree to overpay for your new mortgage loan the broker gets a kickback of one additional percent of your loan amount. In most cases this will double, even triple your mortgage broker’s compensation for your loan. The problem with this markup is that most mortgage brokers will never admit that they’ve marked up your mortgage rate and go great lengths to conceal what they’re doing.

How to Recognize Yield Spread Premium

The first opportunity to spot this markup of your mortgage rate is when you lock in your rate. If your mortgage broker actually requests a rate lock from the lender he or she will receive written confirmation of the lock. This rate lock from the wholesale mortgage lender will clearly display any markup of your mortgage interest rate. The problem is that many brokers type up a bogus rate lock confirmation on their own company letterhead that does not include Yield Spread Premium. This rate lock is completely worthless because it did not come from the lender and only serves to hide what the broker did to your mortgage rate.

Many brokers falsify this document and never actually lock in your mortgage rate. When the deal falls through because there was no lock the broker will find a way to switch you a more expensive mortgage product. This is a common bait-and-switch tactic used by many dishonest mortgage brokers. When you lock in your mortgage rate always insist on seeing the actual guarantee from the lender and never accept anything on your mortgage broker’s letterhead.

Yield Spread Premium on Your HUD-1

Your second opportunity to catch Yield Spread Premium on your loan is with the HUD-1 Statement. Your mortgage broker cannot falsify this document; however, you might not recognize the fee as Yield Spread Premium. If your loan includes the lender kickback it will be disclosed on lines 810-811 of the HUD-1. You might see it called “mortgage broker rebate” or “YSP paid to broker.” Whatever dollar amount you find on this line is the kickback your broker receives for overcharging you.

You Can Refinance With a Wholesale Mortgage Rate

Most homeowners don’t understand that they can refinance with a wholesale mortgage rate without paying this “retail” markup. You can find mortgage brokers willing too give you wholesale rates once you know how to negotiate the deal. If you’d like to learn more about negotiating with mortgage brokers for wholesale rates register for our free mortgage video tutorial.

If you are in the process of purchasing your home or refinancing your existing mortgage you will most likely encounter the term “points.” What are points and is it ever in your best interest to fork over additional cash at closing? Here are the basics you need to understand about mortgage points and whether or not it’s in your best interest to pay them.

Mortgage Points Come In Two Flavors

There are two varieties of mortgage points. The first are the origination points you pay for your loan originators part in arranging your loan. Your loan originator could be a mortgage company, internet mortgage site, your bank, or a mortgage broker. Origination fees vary widely and are one of the reasons many homeowners overpay for their mortgage loans. How much is a reasonable amount to pay for your mortgage origination points? A reasonable fee to pay is one percent of your loan amount and not a penny more.

One Mortgage Point = One Percent of Your Loan Amount

The second type of mortgage points you will encounter are the “discount” points you pay in exchange for something from the lender, usually a lower mortgage rate. Discount points can be used for other reasons when negotiating; for example you could negotiate to pay discount points in exchange for a certain rate and not having a prepayment penalty included in your loan contract. Don’t underestimate your ability to negotiate with mortgage lenders, especially with the current economy. Mortgage lenders are hurting and are desperate to close loans. You can leverage this to your advantage when negotiating for loan terms.

Should You Pay Discount Points?

The decision to pay discount points depends on your financial situation and what you have to gain by paying this fee. One of the main factors to consider is how long it will take you to recoup the expense from paying discount points with the lower mortgage payment. You can easily calculate how long this will take by dividing the amount you’ll pay in discount points by how much lower your mortgage payment will be because of the fee. This will tell you the number of months it will take you to recoup paying discount fees before you realize any savings. If you plan on selling your house within the next five years or in the amount of time you calculated above, it doesn’t make sense to pay discount points.

There Are Tax Advantages When Paying Discount Points

Paying discount points will earn you a tax deduction in most cases. According to the IRS the discount points you pay are prepaid mortgage interest. There are stipulations and you may or may not be able to deduct the full amount in one year according to IRS rules; however, this prepaid interest can certainly reduce your tax liability if you itemize deductions on your tax returns.