Mortgage Refinance Guide

If you are a Colorado home owner considering a new mortgage loan, there are several steps you can take to avoid paying too much when refinancing. Comparison shopping mortgage offers will only get you so far unless you know how to negotiate for wholesale mortgage rates. Here are several tips to help you refinance your Colorado home mortgage with the lowest rate possible for your situation.

Many homeowners start their search for a new mortgage by typing Colorado Home Mortgage Refinance Loan into a search engine. This search would return a number of websites promising mortgage quotes with low interest rates. The problem with these “Colorado Home Mortgage Refinance Loan” quotes is that they include retail mortgage rates that have markup intended to give the loan originator a fat commission check.

So what makes a mortgage loan “retail?” Retail mortgages include markup known as Yield Spread Premium. This markup is the difference between the wholesale interest rate the lender approved your loan and the mortgage rate you closed with. Mortgage companies and brokers mark up interest rates because wholesale lenders pay them a bonus for closing mortgage loans with above market interest rates. For every quarter percent you agree to overpay your loan originator pockets one percent of your mortgage amount.

Here’s an example of how retail mortgage interest rates work. Suppose you refinance your Colorado home mortgage for $250,000 for 30 years at 6.75% interest rate. Your mortgage broker charges you an origination fee of one percent and tells you what a fabulous deal you’re getting. (Sound familiar?) What your broker isn’t telling you is that the wholesale lender approved you for a 6.25% mortgage rate and they’ve marked it up to 6.75% for a commission.

In the previous example the mortgage broker pockets your origination fee of $2,500 plus $5,000 from the lender for a total of $7,500. You’re stuck with an above market interest rate that you didn’t have to pay. Don’t let this scenario happen with your Colorado home mortgage refinance loan; by learning how to recognize Yield Spread Premium you will keep the wholesale mortgage rate your lender approves you. You can learn more about refinancing without overpaying by requesting our free mortgagee toolkit using the link at the top of this page.

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.

Mortgage refinancing offers several ways to pay off debts and reduce the burden on your monthly budget. Refinancing your mortgage could allow you to lower your monthly payments and pay off your credit cards and other high interest debts. Borrowing against the equity in your home could even allow you to purchase a new car. Lastly, if you’re able to qualify for a lower mortgage rate you can lower your payment and pay less to the lender over the lifetime of your mortgage.

Mortgage Refinancing to Consolidate Bills

Taking out a new mortgage allows you the opportunity to borrow against the equity in your home. You can use this cash for any reason including paying off your bills including those high-interest credit cards. The advantage of consolidating your debts under your mortgage loan is that you gain a tax-deduction for all of the interest you pay. Cashing out when refinancing is a convenient way of borrowing against your equity and allows you to qualify for a lower mortgage rate than you would get with a second mortgage or equity line of credit.

Mortgage Refinancing to Lower Your Payment

There are several ways to lower your mortgage payment even if you cannot qualify for a lower interest rate. You can still lower your payment amount by extending the term length of your loan. By switching to a 30 or even 40 year term length you’ll spread your payments out over a longer period of time. This gives you a lower payment and more cash at the end of the month.

Another way to lower your monthly mortgage payment is to switch to an Adjustable Rate interest-only or option loan. These are risky mortgages; however, when used correctly they could save you a lot of money. You can learn more options for saving money when refinancing your home mortgage with our free, six-part mortgage refinancing video tutorial.

Before applying to refinance your home mortgage loan it is important to take stock of your credit reports and check for any inaccuracies. Your credit score is derived from your credit reports and any inaccurate or negative information will have a significant impact on your FICO score and the mortgage rate you will qualify. Here are several tips to help improve your credit score prior to mortgage refinancing.

Improving your credit score is a long term endeavor; there are no quick fixes for financial problems. There are however a number of habits you can develop which will improve your FICO score and get you a lower mortgage rate.

Make All of Your Payments on Time

Your credit score is complex calculation made up of a number of factors; however, 35% of this score is based on your payment history. Paying all of your bills on time is the best thing you can do to improve your credit score.

Pay Down Your Credit Cards

Paying down the balances on your credit cards will also help improve your credit score prior to mortgage refinancing. The amount you owe accounts for 30% of your credit score. Avoid maxing out your credit cards, making large purchases, or opening new lines of credit prior to refinancing your mortgage.

You can learn more about improving your credit score before applying for a new mortgage, including costly mistakes to avoid with our free mortgage tutorial.

If you’re shopping for a new home mortgage loan, the interest rate you receive is important because it helps determine your monthly payment amount. There are a number of other factors to consider when choosing a home mortgage refinance loan; here are several tips to help ensure you get a good deal and a good mortgage rate.

Comparison shopping for a low mortgage rate will not guarantee you a good loan. At best you’ll end up with the best of the worst mortgage offers available. At worst you’ll overpay thousands of dollars every year you keep the loan. The reason for this is that nearly every mortgage quote you receive when comparison shopping includes the hidden markup known as Yield Spread Premium. If you’re not familiar with this term you’re paying too much for the mortgage you have now.

What is Yield Spread Premium? When you qualify for a home mortgage refinance loan the wholesale lender behind your mortgage approves you for a certain interest rate. You mortgage representative knows this interest rate; however, they mark it up because the lender pays them a commission for overcharging you. That’s right, for every .25% that you overpay your loan representative receives a bonus of 1.0% of your mortgage amount. This bonus is in addition to the fees you are already paying for their part in arranging your new home mortgage loan.

Homeowners who unknowingly accept a mortgage that includes this markup pay thousands of dollars every year unnecessarily. You can avoid Yield Spread Premium with your home mortgage refinance loan if you’re upfront with the loan representative while comparison shopping. Tell your mortgage representative that you will not tolerate Yield Spread Premium, that you’ll pay a reasonable origination fee and any necessary third party settlement fees. Once you find a mortgage company that agrees to these terms, and any honest company would, you are in a position to choose the best mortgage for your financial situation. You can learn more about shopping for the best home mortgage refinance loan while avoiding costly mistakes like Yield Spread Premium with our free mortgage video tutorial.