Home Mortgage Refinancing Guide

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.

Mortgage brokers are salespeople just like any other kind; they are paid by commission and it’s in their best interest to sell you something that gives them the largest commission. When it comes to your mortgage, the loan that offers the highest commission is probably not the best loan for your situation. Finding the best mortgage for your financial takes more than just comparison shopping; you’ll need to negotiate with potential mortgage brokers to ensure the fees and mortgage rates you’re quoted are fair.

Understanding how mortgage brokers are compensated will help you avoid paying too much when refinancing your home loan. For starters, mortgage brokers make money in two ways. Brokers are compensated by the origination fees you pay at closing and by marking up your mortgage interest rate. The origination fees you pay should never be more than 1% - 1.5 % of your loan amount; this origination fee pay is easy enough to haggle over when choosing a broker. The problem comes when the broker marks up your mortgage interest rate.

What is Yield Spread Premium? This retail markup of your mortgage interest rate is the difference between the rate you were approved by the wholesale lender and the mortgage rate you close. The mortgage broker marks up your rate because the lender pays them a bonus of 1% of your loan amount for every .25% they markup your interest rate. This frequently happens without your knowledge or consent.

The good news is that you can avoid paying this unnecessary and frequently hidden markup of your mortgage interest rate by negotiating with potential mortgage brokers. Tell your mortgage brokers that you will pay a reasonable origination fee of one percent (start low and negotiate higher if necessary) and all necessary third party closing costs. Tell your potential mortgage brokers that you understand how Yield Spread Premium works and will not accept the markup. Any honest mortgage broker will agree to these terms. Ask to see the lock agreement from the wholesale lender and compare it to the rate lock you received from your broker.

You can learn more about working with a mortgage broker without losing your shirt by registering for our free mortgage tutorial.

Mortgage loans can be very confusing and there is an abundance of bad advice available on the Internet. Much of the mortgage information you find online is sales motivated and if you’re not careful you could wind up paying thousands of dollars unnecessarily. This is why doing your homework and carefully researching mortgage offers is important before applying for a new loan.

Doing your homework means more than simply comparing loan offers and choosing the loan with the lowest mortgage rate. You’ll need to negotiate with the mortgage companies you request quotes from to avoid paying Yield Spread Premium. This markup will cost you thousands of dollars in unnecessary mortgage interest each year if you accept a loan that includes this markup.

What is Yield Spread Premium? This is the markup your loan representative adds to your interest rate to boost their commission, often without telling you. Here is an example of how Yield Spread Premium works: suppose you are refinancing with a $300,000 loan using a mortgage broker. Your broker tells you that you qualify for a 6.5% mortgage rate and charges you 1.0% for the loan origination fees. What your mortgage broker isn’t telling you is that the lender approved you for 6.0% mortgage rate and they marked it up to receive a 2.0% bonus from that lender. The difference between the 6.0% mortgage rate you qualified and the 6.5% rate that you closed is Yield Spread Premium.

Once you understand how Yield Spread Premium works you can negotiate to avoid paying it. Tell your potential mortgage brokers that you will not accept this markup with your loan. Tell them you will pay a reasonable origination fee and all necessary closing costs; however, will not pay any amount of Yield Spread Premium. You can learn more about refinancing your mortgage without paying too much with our free mortgage video tutorial.

Mortgage brokers can be an excellent resource for refinancing your California mortgage loan; however, you have to watch your broker like a hawk to avoid overpaying for your new mortgage. In addition to giving you a mortgage rate that includes Yield Spread Premium, brokers often place homeowners in loans that serve their need for a commission instead of finding you a good deal.

If you’ve already watched the mortgage videos on this site, you’re familiar with Yield Spread Premium and know how mortgage brokers mark up your interest rate to boost their profits. The best way to avoid paying this unnecessary markup of your mortgage interest rate is to be upfront with your mortgage broker before entering into an agreement. Tell your mortgage broker that you’ll pay a reasonable origination fee for their services and all necessary closing costs but will not pay Yield Spread Premium with your interest rate.

Choosing the right type of mortgage for your situation before negotiating with a mortgage broker is also very important. Don’t let a mortgage broker fast talk you into a risky interest only or option Adjustable Rate Mortgage if you don’t fully understand what you’re getting into. The type of mortgage and the term length you choose depends on your financial situation, tolerance for risk, and your goals for the loan.

Most homeowners benefit from a fifteen year term length instead of a thirty year loan when refinancing their California mortgage loans. You will qualify for a lower mortgage rate and will pay significantly less in finance charges with a fifteen year mortgage. The interest rate you should choose depends largely on your tolerance for risk. When used correctly, Adjustable Rate Mortgages can save you a lot of money if you have the stomach for the risk involved. You can learn more about your California mortgage refinancing options, including costly mistakes to avoid with our free mortgage tutorial.