Home Mortgage Refinancing Guide

If you’re in the market for a new home loan and looking for mortgage refinancing company, there are several things you need to know before applying. The most important thing you need to know about mortgage companies is that they are all retail outlets for home loans. What this means is that the mortgage company you choose is simply reselling mortgage loans for a wholesale lender.

What Makes Your Mortgage Retail?

Many homeowners don’t realize mortgage loans are retail products. What makes the mortgage “retail” is the interest rate. Mortgage companies and brokers mark up wholesale interest rates to get a bonus form the lender. This “lender paid compensation” is called Yield Spread Premium and results in paying above market interest rates when refinancing your mortgage.

Why is Yield Spread Premium Bad?

The reason that agreeing to pay Yield Spread Premium when refinancing is a bad thing is that you’re already paying a perfectly reasonable origination fee for your mortgage company’s service. Lender paid compensation on your loan is paid as a reward for overcharging you. This is why agreeing to pay any amount of Yield Spread Premium should be avoided completely.

Here’s an example of the retail markup a mortgage refinancing company adds to your home loan. Suppose a homeowner refinancing their mortgage with a local mortgage company applies for $315,000. The mortgage company tells them they qualify for a 7.5% interest rate and charges them 1.0% of the loan amount or $3,150 for the origination fee. What this homeowner doesn’t know is that the wholesale mortgage company approved them for a 7.0% mortgage rate and their mortgage company is overcharging them. Your mortgage company will probably never admit to marking up your mortgage interest rate. If you know what to look for you can often find the markup in your Good Faith Estimate or on the HUD-1 settlement statement.

Why Charge Yield Spread Premium?

Mortgage refinancing companies can double, even triple their profit margins by overcharging you. They’re legally required to disclose their markup; however, they all have clever ways of disguising retail markup on your Good Faith Estimate and HUD-1. Wholesale lenders know that mortgage loans with higher than market interest rates bring in a premium profit when the loan is sold on the secondary market.

Fortunately for you, homeowners who understand how Yield Spread Premium inflates their interest rate can negotiate with mortgage refinancing companies to avoid paying the markup. Remember you’re already paying a perfectly reasonable origination fee for your mortgage companies services, any markup of your mortgage interest rate is not only completely unnecessary but is taking advantage of you. To learn more about choosing the best mortgage refinancing company for your situation without overpaying for your new loan register for my free video toolkit. You can find links for signing up at the top and bottom of this page.

If you’re in the process of refinancing your mortgage online, (probably why you’re reading this today) there is one mistake that will cost you more money and give you more headaches than any other. What is this horrific mistake? The overwhelming majority of homeowners glaze over when it comes to legal agreements, terms and conditions, and disclosure statements. If you neglect to read these statements, even when doing something as simple as requesting information, you could wind paying too much for your new mortgage.

Here is a case study to illustrate my point.

Ted is a savvy guy. He’s been online for at least ten years now, graduated from college, has a good paying job, wife, two kids and a dog. He was recently promoted at the box company to supervisor position with a good pay raise. He figures the higher income would allow him to qualify for a lower mortgage interest rate, and decides to refinance his mortgage.

Because Ted’s been online for a while now he’s comfortable doing his banking online and decides the Internet would be a great way to find a new mortgage loan. He’s seen those commercials on TV about making different lenders compete for his business, and decides to check out the mega lending website to get a quote. Ted fires up his computer, visits the mega get lenders to compete website, and fills out their contact form with his personal information. Ted has just made a colossal mistake.

What Ted didn’t do was read the Licenses & Disclosure statement found at the bottom of that mega mortgages compete website. Had Ted taken a minute to read this disclosure statement he would have found that the mega lenders compete website receives a fee of up to $1,300 for “arranging” his mortgage loan. Who pays this fee? Why, Ted of course!

The disclosure statement goes on to say that if he takes out his loan from one of the lenders in the mega mortgage website’s “network” this charge of up to $1,300 will appear on his Good Faith Estimate, which Ted will have to pay at closing. Because Ted filled out the form on the website, he’s overpaid for his new loan and doesn’t even know.

Ted may be a dead head for not reading; however, the risks of refinancing without reading terms and conditions are real. Always read the terms, conditions, and disclosure statements before entering any information requesting a quote on the Internet.

Yield Spread Premium is one of the least known, yet expensive mistakes homeowners make when refinancing a mortgage loan. Most homeowners have never heard of Yield Spread Premium, and if you agree to pay this markup of your mortgage interest rate when refinancing you will spend thousands of dollars unnecessarily.

So what is Yield Spread Premium? Assuming that you are not refinancing with a Bank (we’ll talk about Bank originated mortgages later), Yield Spread Premium is the markup of your mortgage interest rate by the person originating your loan for a higher commission. Here’s how this markup works.

Mortgage loans are retail products; with the exception of bank originated mortgage loans there is always a wholesale lender behind your mortgage. When this wholesale mortgage lender approved you for mortgage refinancing, you are approved for a specific wholesale mortgage interest rate. This rate was provided to your loan originator, be it your mortgage company or broker. This person marks up the interest rate you were approved because the wholesale lender pays them a bonus for charging you more.

That’s right, for every quarter point you agree to pay over the mortgage rate you qualified, this person receives a bonus of one percent of your loan amount. This bonus is in addition to the fees you’re already paying for the application and loan origination. If you unknowingly agree to pay this markup you are effectively paying this person double for the work they do in addition to overpaying thousands of dollars for your new mortgage.

What about Bank mortgage loans?

There’s no wholesale lender with a Bank, aren’t you better of refinancing your mortgage through your Bank? While it’s true that Bank originated mortgages are a convenient way to refinance your mortgage, Bank loans are not exempt from mortgage yield spread. When a Bank marks up the wholesale mortgage rate you would have qualified it simply has a different name. Banks mark up mortgage interest rates to boost their profit when your loan is sold to investors on the secondary market. When this markup is done by a bank it is called Service Release Premium and due to a loophole in the Real Estate Settlement Procedures Act, the Bank is not required to disclose that they are marking up your mortgage interest rate. It is because of this loophole that you should never refinance your mortgage with a Bank.

If you are the in the process of refinancing your home mortgage loan, doing your homework before applying for a new mortgage will help you avoid costly mistakes. There are number ways to overpay for a new mortgage loan; the most common is unknowingly paying Yield Spread Premium with your mortgage interest rate. Yield Spread Premium is the retail markup of your mortgage interest rate by the Mortgage Company or broker originating your loan.

Your Mortgage Makeover – Avoid Yield Spread Premium

Yield Spread Premium Results in paying thousands of dollars in unnecessary interest and only serves to boost the commission of your loan originator. Another garbage fee you need to be aware of when refinancing is the computerized loan origination fee charged by many mortgage sites on the Internet. This is a fee paid to these websites for collecting your contact information. One well known mortgage site charges as much as $1,300 for their part in “facilitating” your mortgage loan. You can avoid these computerized loan origination fees by carefully reading the licenses and disclosure statements found on the mortgage site before entering your contact information.

Your Mortgage Makeover – Comparison Shop with the Good Faith Estimate

Comparison shopping with the Good Faith Estimate will provide you a better picture as to which loan offer is best suited to your needs. Many people tell you to use the Annual Percentage Rate or APR when shopping for a mortgage; however, the APR does not give you enough information to make an informed decision as to which loan is best for you. You can learn more about your mortgage options, including expensive mistakes to avoid with our free mortgage makeover video tutorial.