Refinance Home Mortgage Guide

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 considering using a mortgage broker to refinance your home mortgage loan, there are several things you need to know before choosing a broker. Mortgage brokers are very similar to used car salesmen as the more you pay the higher their commission will be. Mortgage lenders actually pay an incentive to brokers for overcharging you. This incentive is called Yield Spread Premium and avoiding this markup needs to be your number one priority when refinancing. Here are the basics you need to know when choosing the right mortgage broker to refinance your home.

Yield Spread Premium: What You Need to Know

Mortgage brokers are compensated for the work by charging you an “origination fee” for the loan and by a premium paid by the wholesale lender. This premium is paid when the broker marks up the interest rate that your lender approved you. The “Yield Spread Premium” is the difference between the wholesale rate you were approved and the interest rate your broker tells you that you qualified. This markup is what makes mortgage rates retail; fortunately, homeowners who understand how this works can avoid paying it and qualify for wholesale mortgage rates.

Many mortgage brokers tell you not to worry about the premium because the fee is being paid by the lender. The problem with this reasoning is not the fact that the lender is paying the fee, but why they’re paying it in the first place. This fee is a reward to the broker because you’ve agreed to refinance with an above market mortgage rate. Your broker receives a commission of one percent of your loan amount for every .25% you agree to overpay. Most brokers omit their markup from your Good Faith Estimate so you’ll have to pay close attention to your HUD-1 statement. Look for this unnecessary markup to be disclosed around line 810 of the HUD-1.

How to Find a Broker Without Paying Yield Spread Premium

This commission based markup of your mortgage interest rate can be avoided. If you’re up-front with potential mortgage brokers and let them know that you understand how Yield Spread Premium works you can refinance your mortgage with a wholesale mortgage rate. When comparison shopping for a broker you might have the best luck working with one that is self-employed. Large brokerage house may not give their mortgage brokers the authority to make you a deal that doesn’t include Yield Spread Premium. Whenever possible try and deal with the owner of the business and let them know up front that you will not accept any mortgage that includes lender paid compensation for a higher interest rate.

You can learn more about your mortgage refinancing options, including expensive pitfalls to avoid by registering for a free video toolkit.

Very few homeowners understand how mortgage brokers are compensated for their work. As a result, nearly everyone overpays in one form or another…mortgage brokers are very similar to used car salesman. Pressure sales tactics and improper disclosure of fees and markup are common tactics employed by mortgage brokers…so much that the Secretary of Housing and Urban development was quoted saying that homeowners in the United States will overpay nearly sixteen billion dollars this year because of this abuse. Here are several tips to help you avoid being taken advantage of by understanding how mortgage brokers are compensated.

Loan Origination Fees

The first method of mortgage broker compensation that we’ll discuss today are loan origination fees. Origination fees are commonly referred to as “Origination Points.” Remember that a “point” is one percent of your mortgage amount due at closing. Origination points are different from the discount points you pay to your lender in exchange for a lower rate because this fee goes directly into your mortgage broker’s pocket.

What is a reasonable origination fee? Many homeowners are shocked to find origination fees as high as three and four percent on their Good Faith Estimate…and rightly so. A reasonable fee to pay your mortgage broker for their part in arranging your loan, regardless of a new home purchase or refinancing your existing mortgage is one percent of your loan amount. (Not a penny more)

Beware Junk Fees

Mortgage brokers are notorious for padding your Good Faith Estimate with junk fees. Application fees, processing fees, broker courier fees, rate lock fees are utter garbage that you should simply refuse to pay. Take the “rate lock fee” for example. Wholesale lenders never charge the broker a fee for locking in a mortgage rate. The fact that many brokers invent rate lock fees is ludicrous…the same thing goes for the “loan processing fee.” Many brokers claim that they use “professional loan processors” to prepare your folder for the underwriter and charge as much as $500 for the service.

If I was paid $500 an hour for printing out loan documents prepared by computer and Fedexing your file to the underwriter we wouldn’t be having this discussion today. When reviewing the Good Faith Estimate with your mortgage broker tell them that if they want your business they need to drop the junk fees and give you a fair deal.

Yield Spread Premium

The ultimate sleazy trick employed by mortgage brokers today is including Yield Spread Premium (YSP) in your mortgage interest rate. Yield Spread Premium is the markup that makes mortgage rates “retail.” Your broker qualifies you for a specific interest rate from a wholesale mortgage lender. This person will then markup up that interest rate because the lender pays them a bonus for loans closes with above market interest rates. Think your mortgage broker will tell you that they’ve done this to your mortgage rate? Think again…in fact many brokers become defensive and angry when questioned about Yield Spread Premium.

How does your mortgage broker cover up the fact that they’ve marked up your mortgage interest rate? Most brokers omit this markup from the Good Faith Estimate entirely. After all, it’s just an estimate given in “good faith.” Your broker’s not really breaking the law by leaving it off the Good Faith Estimate; however, they have no choice but to list this markup on the HUD-1 statement. The problem with the HUD-1 statement is that brokers have clever ways of justifying and disguising the markup.

What does Yield Spread Premium look like? If the markup is listed on your Good Faith Estimate it will be found around lines 810-811. You’ll notice that the HUD-1 statement looks very much like a Good Faith Estimate but will a more complete disclosure of fees. If Yield Spread Premium is present you will see it listed as YSP, Yield Spread Premium paid to broker, or some variation of Lender Paid Fees. Your mortgage broker may tell you not to worry about this fee because it’s being paid by the lender…as long as it’s not coming out of your pocket what do you care, right?

Wrong! The reason you should care and get downright angry about Yield Spread Premium is because of the reason your lender is paying the fee. Lenders pay one point (remember a point is one percent of your mortgage) for every .25% your mortgage broker overcharges you. This is in addition to the point that you’re already paying for loan origination. Because of this markup you get stuck paying hundreds of dollars in unnecessary mortgage interest and your broker walks away with double, often triple the compensation for their work.

Now the question you’re asking becomes “How Can I Avoid Paying This Ridiculous Markup of My Mortgage Interest Rate?” The answer is simple: Homeowners who learn how to recognize this unnecessary markup of their mortgage interest rate can negotiate with potential mortgage brokers to avoid paying the markup.

If you would like to learn more about taking out a mortgage without paying too much to the broker, register for this free Mortgage Refinancing Blueprint.