Home Mortgage Refinancing Guide

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.

Finding the right person to originate your mortgage can mean the difference between refinancing with a perfect loan and making an expensive mistake. Mortgage brokers work on commission just like a used car salesman; many rely on many of the same sales tactics. Here are several tips to help you find the right mortgage broker when refinancing your mortgage.

Why You Should Refinance With a Mortgage Broker

Despite their shortcomings and reputation as sleazy salespeople, mortgage brokers have access to wholesale mortgage rates. You’ll never get access to wholesale rates refinancing with your bank or most internet lenders; only a mortgage broker can get you the lowest wholesale interest rate. The problem with mortgage brokers is that most of them will try and line their pockets at your expense.

Before you decide to refinance your home mortgage with a broker it is important to understand how mortgage brokers are compensated. Mortgage broker compensation comes from two sources: you and the lender. Your broker will charge you “origination points” for their services. This fee should not be more than one percent of your loan amount or one point. In addition to the fees paid out of your pocket mortgage brokers are compensated with a commission from the lender.

This lender kickback to your mortgage broker serves only one purpose; it’s a reward for charging you an above market interest rate. Mortgage brokers do this because the lender pays them an additional point for every quarter percent you agree to overpay. Remember that one point is always one percent of the loan amount and this kickback from the lender is paid in addition to the origination fees you’re already paying.

Avoiding Mortgage Lender Kickbacks

This kickback from your lender for overcharging you is called Yield Spread Premium and is simply the difference between the wholesale interest rate you qualified and the above market rate your broker offers you. Your challenge when refinancing your mortgage is not finding the best offer as many homeowners think, but finding an upfront mortgage broker that will work for a reasonable origination fee without charging you Yield Spread Premium.

Many Homeowners Have Never Heard of Yield Spread Premium

The majority of mortgage brokers will not admit that they’re marking up your mortgage interest rate for profit. Ask your broker direct questions about Yield Spread Premium and many will try and explain it away as a fee the lender pays. They’ll even tell you not to worry about it because the money isn’t coming out of your pocket. What your mortgage broker isn’t telling you is that Yield Spread Premium is paid as a reward for overcharging you. When confronted with this fact many brokers become defensive and angry; and why wouldn’t they? Yield Spread Premium is effectively doubling, often tripling the compensation they receive on your loan.

How to Recognize Yield Spread Premium

Mortgage brokers have clever ways of disguising and explaining away their markup. Many brokers leave Yield Spread Premium off your Good Faith Estimate entirely; however, they are required to list it on the HUD-1 statement. If this markup is include in your loans you will find it on lines 810-811 of the settlement statement. Your HUD-1 can be used to keep your mortgage broker honest; however, when shopping around for the right broker you’ll need to negotiate for one that won’t charge you this unnecessary markup.

What is an Upfront Mortgage Broker?

Upfront mortgage brokers are as the name implies brokers that disclose their fees in writing before you commit to a loan. The upfront mortgage broker works for an origination fee and will not add Yield Spread Premium to your mortgage interest rate. Conventional mortgage brokers charge “retail” mortgage rates and getting them to admit they’re the reason the mortgage rate is retail is next to impossible.

When shopping for a mortgage broker look for one that is a member of the Upfront Mortgage Broker Association (UMBA). If there are no members working in your State you can still negotiate with potential mortgage brokers to avoid paying the markup. Tell any potential mortgage brokers that you understand how Yield Spread Premium works and will not tolerate this markup of your mortgage interest rate. Tell them you will pay a reasonable origination fee for their services but will not accept any loan that includes lender paid compensation.

According to the Secretary of Housing and Urban Development Yield Spread Premium is responsible for homeowners in the United States overpaying almost sixteen billion dollars each year. You might ask how Yield Spread Premium is even legal when it is rarely disclosed and clearly taking advantage of homeowners; however, despite the raging debates in congress this unnecessary markup and fleecing of the American homeowner remains perfectly legal.

You can learn more about refinancing your home mortgage loan with a wholesale mortgage rate without overpaying with my free video toolkit. Register today, the videos are free and there is no obligation to you whatsoever.

If you’re a homeowner considering a new mortgage, learning about Yield Spread Premium is well worth your time. If you unknowingly accept a loan that includes Yield Spread Premium you could overpay thousands of dollars every year you keep the loan.

What is Yield Spread Premium?

Simply put, it is interest rate markup by the person arranging your loan so that you lock and close with an above market mortgage rate. Mortgage originators do this because lenders reward them for closing loans at higher than market interest rates. In fact, lenders pay 1.0% of the loan amount for every .25% you agree to overpay. The difference between the mortgage rate you could have and the above market rate you pay is Yield Spread Premium.

Yield Spread Premium in Action

Suppose you refinance your home with a $200,000 loan at 6.75%. Your mortgage broker charges you 1% of your loan amount for the origination which is a reasonable amount to pay. What the broker isn’t telling you is that the wholesale lender approved you for a 6.0% and they’ve marked it up for a commission. In this example your mortgage broker pockets the $2,000 loan origination fee you pay plus $6,000 from the lender for overcharging you. You get stuck paying an above market mortgage rate and your broker walks away with $8,000.

You Can Avoid Yield Spread Premium

Fortunately, homeowners who understand how Yield Spread Premium works can avoid paying it. When shopping for a loan offer tell your potential brokers that you understand Yield Spread Premium and will not tolerate lender paid compensation with your loan. Ask to see the rate sheet from your wholesale lender and compare it to the interest rate guarantee you receive from the broker. You can also find Yield Spread Premium disclosed on your HUD-1 statement. This markup is usually listed on lines 810-812. You’ll often see it listed as “Yield Spread Premium paid by lender” or called YSP or POC. (POC stands for “Paid Outside Closing”)

You can learn more about refinancing your mortgage while avoiding unnecessary markup of your mortgage interest rate with our free mortgage toolkit.

If you are considering refinancing your home loan with a mortgage broker, you might want to reconsider. Mortgage brokers can be an excellent resource when refinancing; however, if you’re not careful you could find yourself overpaying thousands of dollars. Here are several reasons that you might reconsider refinancing your home loan with a mortgage broker.

I. Mortgage Brokers Are Paid by Commission

Mortgage brokers make a living by commission and the loan that nets them the largest commission is probably not the best loan for you. If you don’t fully understand the loan you are getting you could find yourself with a risky interest-only or option Adjustable Rate Mortgage that you can’t afford.

II. Mortgage Yield Spread Premium

In addition to pocketing the origination fees you pay when refinancing your loan, the mortgage broker marks up your mortgage interest rate to receive a bonus from the wholesale lender behind your loan. That’s right, for every .25% you agree to pay above the mortgage rate you qualified, your mortgage broker pockets a bonus of 1% of your loan amount. Your broker does this without telling you, and the markup is buried deep in your mortgage’s disclosure statement. This markup of your mortgage interest rate is called Yield Spread Premium and if you pay it you’ll overpay thousands of dollars for your new mortgage loan.

III. Used Car Salesman Mentality

Because mortgage brokers are paid by commission and incentivized by Yield Spread Premium, most are more interested in pulling down a six-figure salary than they are helping you find a decent mortgage. I’m not saying that every mortgage broker out there would swindle your Grandparents out of their Social Security check; however, many of them would. There are no criminal background checks required before getting a mortgage broker’s license and nearly anyone can past a test to become one. If you absolutely have to work with a mortgage broker when refinancing, for example if you have bad credit, you’ll have to watch your broker like a hawk to avoid overpaying.