Mortgage Refinance Guide

Flat Fee Mortgage Refinancing

Companies like Ditech offer great rates on their websites…until you read the fine print. I was on Ditech.com earlier today and they were offering a 5% fixed 30 year rate which is actually lower than today’s par or wholesale rate. How are they able to do this?

Check out the fine print and you’ll find out that you have to pay two points just to get this rate. So much for the low, flat fee…read the fine print on other “no fee” mortgage offers and you’ll discover that you’re trading fees for a higher mortgage rate.

While no cost mortgage refinancing sounds like a good offer, the mortgage rate you’re getting isn’t just a quarter point higher than you’d pay otherwise…it’s often a full point higher. There are dozens of no cost mortgage offers out there but most of them are only disguising their fees. If you are truly in need of no cost financing there are ways for honest mortgage brokers to cover your expenses with a higher mortgage rate; however, in most cases this is just a marketing gimmick to sell you an overpriced loan.

Yield Spread Premium Can Be Used For Good…

There are honest mortgage brokers that will structure loans with a higher than market mortgage rate and use the broker rebate to pay closing costs. Many mortgage brokers pocket this rebate after marking up your rate without telling you; this abuse of is so bad that the Secretary of Housing and Urban Development acknowledged that Yield Spread Premium is responsible for homeowners overpaying nearly sixteen billion dollars a year.

The way Yield Spread Premium works is that your broker receives a rebate of 1% of your loan amount for every .25% you pay above the market or par mortgage rate. If you don’t have the money to pay your closing costs your broker can simply use the rebate to cover your expenses. Remember that you’re agreeing to pay a higher mortgage rate in exchange for your closing costs…you’ll have a higher mortgage payment and have to spend more on finance charges for the duration of your loan.

Refinancing your home with a no cost mortgage could result in a monthly payment that is several hundred dollars higher than you’d have if you paid the closing costs yourself. This is also true if you unknowingly agree to a mortgage that includes Yield Spread Premium, a problem that happens to the majority of homeowners in the United States. You can learn more about your mortgage refinancing options, including expensive pitfalls to avoid by registering for our free video tutorial.

You’ve probably seen the television ads claiming that no cost mortgage refinancing is “a no brainer.” Advertisers love to claim that they’ll pay your closing costs and offer zero cost refinancing. Most homeowners responding to these offers don’t realize how much of a lie no cost refinancing is. Here is the truth you need to know about the no cost mortgage refinancing lie.

Most homeowners don’t understand how mortgage lenders make their money. The majority of lenders today don’t sit on your loan collecting interest month in and month out. Most lenders make their money by selling loans to investors on the secondary market; the profit they make by selling your loan is called Service Release Premium. The fact that lenders sell your mortgage loan has more to do with you than you think; lenders reward brokers for charging you an above market interest rate to boost their profits when the loan is sold.

Your mortgage broker simply acts as an agent reselling loans for a wholesale lender. Mortgage brokers mark up the interest rate you qualify because the wholesale lender pays them a bonus for every .25% they overcharge you. This means the loan you get is anywhere from 100 to 150 basis points higher than what you could have had. This is why the average homeowner gets a retail rate on their mortgage loan. The interest rate has been marked up to give the broker a bonus.

The problem with this markup is that most brokers do not tell you what their doing and frequently omit what they’re doing on your Good Faith Estimate. Because you’re already paying your mortgage broker a fee for originating your loan any markup of your mortgage interest rate for a commission is not only unnecessary, but is taking advantage of you as a consumer.

In addition to marking up your mortgage interest rate for a profit, many brokers invent fees when processing your loan. These junk fees are often for thinks like “locking in your mortgage rate,” “application fees,” and “courier fees.” Most of these junk fees go straight into your mortgage brokers pocket for no good reason. So what about these companies claiming to offer no fee mortgage loans?

No Fee Mortgage Refinancing is a Lie

The truth is that every mortgage has legitimate fees that must be paid. If the lender is paying these fees upfront they are being paid on the back end in the form of Service Release Premium. When you refinance your mortgage with a “no fee” mortgage you’ll be accepting a much higher mortgage rate meaning that you’ll pay more than you need to for the loan. The lenders know they’ll make up the fees they’ve paid for you and double, even triple their profits when the loan is sold on the secondary market. You’ll be stuck paying hundreds of dollars more each month while the lender makes a handsome profit selling your loan. You can learn more about your refinancing options, including expensive pitfalls to avoid with this free mortgage tutorial.

Closing costs can be one of the most frustrating and confusing aspects of refinancing your mortgage. Settlement charges are rarely explained and vary widely from lender to lender. How do you know that the settlement charges listed on your Good Faith Estimate are accurate and fair? Are any of the third party charges subject to negotiation? Here are several tips to help you make sense of third party settlement charges when refinancing your mortgage.

Mortgage lenders and brokers are notorious for low-balling third party settlement charges to make their loan offers seem mortgage attractive. The closing costs you pay when refinancing can be divided into the following four categories:

The fees you pay to the lender directly are frequently garbage fees and are the area you should focus most of your attention. Anything listed on your Good Faith Estimate that resembles an “application fee,” “broker courier fee,” “lock fee,” “loan submission fee,” or “administration fee” is a junk fee you can simply refuse to pay.

Another lender fee you should pay close attention to are points. Points come in two flavors: there are the origination points you pay the person who arranges your loan and the discount points you pay the lender in exchange for something like a lower interest rate. A reasonable origination fee is one point, or one percent of your loan amount. Whether or not it makes sense to pay discount points depends on your circumstance and is the topic of another discussion. Points confuse many homeowners because they are not listed dollar amounts; one “point” is the equivalent of one percent of the loan amount paid at closing.

Lender guaranteed settlement fees are paid to third party companies for services required by the lender. These fees vary widely from one lender to the next and include things like appraisals and inspections. Very few lenders guarantee third party charges; however, if you can talk your lender into guaranteeing settlement charges you could save yourself some money.

There are a variety of other third party settlement fees that are not guaranteed by your lender. These charges are listed on your Good Faith Estimate; however, you can’t put too much faith in the figures listed there especially if you are refinancing your mortgage online. You can negotiate to pay fewer lender fees when refinancing by asking the total amount in dollars that you will be required to pay upfront.

Another strategy for lowering your settlement costs when refinancing is to evaluate loan offers based on their total closing costs and choosing the lender with the lowest figures. The only problem with this is that unless the lender guarantees their fees, the figures on your Good Faith Estimate are just that, an estimate. Many lenders low-ball closing costs to make their offers look better.

You can learn more about your mortgage refinancing options, including strategies to avoid paying too much with my free mortgage toolkit. You can sign up for free using the links at the top and bottom of this page.