Home Mortgage Refinancing Guide

Locking in your mortgage rate can be a source of confusion and frustration for many homeowners. When and how do you lock in your mortgage rate? How do you know that your mortgage broker really locked in your rate? Mortgage rates change on a daily even hourly basis; if you miss the opportunity to lock you could lose that low mortgage rate your broker promised you. Here are several tips to help you understand mortgage rate locks and what they mean for your home loan and your bottom line when refinancing.

What Does Locking Your Rate Mean?

When you choose to lock your rate, a process you must initiate yourself, your broker “locks” your mortgage rate with the wholesale lender. The idea is to hold that rate long enough for you to close on the loan. Your broker sets the lock on your behalf with the wholesale lender…more importantly the lock determines the amount of Yield Spread Premium on your new home loan.

What is Yield Spread Premium?

Yield Spread Premium is a percentage of your loan amount created when the broker locks you with an above market mortgage rate. Your broker knows the wholesale mortgage rate that your lender approved you; however, they mark up this interest rate to get a commission from the lender. This commission is called Yield Spread Premium and if you want the best possible mortgage for the long term you need to avoid this commission based markup.

If you plan on living in your home for the long term does it make sense to be constantly refinancing your mortgage loan? Mortgage rates are currently and historically low levels…You’ll probably never see rates below four percent that aren’t teasers. With this in mind doesn’t it make sense to lock in a great rate now and keep it for the long haul? If this is what you’re trying to accomplish you’ll want to lock in a wholesale mortgage rate. Before you can get a wholesale rate you’ll need to understand how mortgage brokers are compensated for originating you loan.

How Are Mortgage Brokers Paid?

There are several ways your mortgage broker gets paid (often overpaid) for their work on your home loan.

Many brokers tell you that they’re not charging you origination fees because of Yield Spread Premium. Does it make sense to take a higher mortgage rate instead of paying a one percent origination fee when you plan on keeping your home for the long term? Absolutely not…If you plan on living in your home for the long term you want a wholesale rate and you only want to pay a once percent origination fee.

How Do You Lock Your Mortgage Rate?

Before you decide to lock in your mortgage rate you need to be sure that you’re working with the right mortgage broker. Talk to your broker about the rate you qualify based on your financial details. Did you know it takes sixteen pieces of your financial details to accurately quote a mortgage rate? If your broker has not asked for detailed financial information before quoting you a rate you can be certain that they have no intention of honoring that rate.

Talk to your broker about their compensation. This includes the origination fee, broker’s fee, and any Yield Spread Premium they get from marking up your mortgage rate.

Remember that a reasonable amount to pay for loan origination including origination points and fees should not be more than one percent of your loan amount. Ask your broker for an updated Good Faith Estimate on a daily bases; remember that mortgage rates are always changing.

Before you make the decision to lock your mortgage rate make sure you have an updated Good Faith Estimate from the same day.

Finally, after you’ve instructed your mortgage broker to lock make sure they email you the rate lock confirmation from the wholesale lender. This confirmation will show you the rate, points, and any Yield Spread Premium associated with your loan. You should have this confirmation within one hour of locking…if you don’t get it contact your broker immediately. Make sure that you get the rate lock from the wholesale lender. Don’t accept anything typed up by your mortgage broker on their own letter head as this is not a guarantee of anything and you want to see if there is any Yield Spread Premium included in your lock.

You can learn more about refinancing your mortgage with a wholesale rate while only paying a one percent origination fee by registering for my free mortgage refinancing videos.

If you are in the process of purchasing your home or refinancing your existing mortgage you will most likely encounter the term “points.” What are points and is it ever in your best interest to fork over additional cash at closing? Here are the basics you need to understand about mortgage points and whether or not it’s in your best interest to pay them.

Mortgage Points Come In Two Flavors

There are two varieties of mortgage points. The first are the origination points you pay for your loan originators part in arranging your loan. Your loan originator could be a mortgage company, internet mortgage site, your bank, or a mortgage broker. Origination fees vary widely and are one of the reasons many homeowners overpay for their mortgage loans. How much is a reasonable amount to pay for your mortgage origination points? A reasonable fee to pay is one percent of your loan amount and not a penny more.

One Mortgage Point = One Percent of Your Loan Amount

The second type of mortgage points you will encounter are the “discount” points you pay in exchange for something from the lender, usually a lower mortgage rate. Discount points can be used for other reasons when negotiating; for example you could negotiate to pay discount points in exchange for a certain rate and not having a prepayment penalty included in your loan contract. Don’t underestimate your ability to negotiate with mortgage lenders, especially with the current economy. Mortgage lenders are hurting and are desperate to close loans. You can leverage this to your advantage when negotiating for loan terms.

Should You Pay Discount Points?

The decision to pay discount points depends on your financial situation and what you have to gain by paying this fee. One of the main factors to consider is how long it will take you to recoup the expense from paying discount points with the lower mortgage payment. You can easily calculate how long this will take by dividing the amount you’ll pay in discount points by how much lower your mortgage payment will be because of the fee. This will tell you the number of months it will take you to recoup paying discount fees before you realize any savings. If you plan on selling your house within the next five years or in the amount of time you calculated above, it doesn’t make sense to pay discount points.

There Are Tax Advantages When Paying Discount Points

Paying discount points will earn you a tax deduction in most cases. According to the IRS the discount points you pay are prepaid mortgage interest. There are stipulations and you may or may not be able to deduct the full amount in one year according to IRS rules; however, this prepaid interest can certainly reduce your tax liability if you itemize deductions on your tax returns.

Points on a mortgage loan can be one of the most confusing aspects of financing your home. The process of taking out a mortgage is intimidating enough…throw in unfamiliar jargon and fees and you’ve got a recipe for financial nightmares. Points on a mortgage loan come in two flavors and depending on the lender and your financial situation you may or may not be required to pay both types. Here are several tips to help you make sense of points and decide paying points is right for you.

What Are Mortgage Points?

Points come in two varieties: there are discount points you pay to your lender and origination points you pay to the mortgage broker arranging your loan. Regardless of the type of point, one point is always equal to one percent of your mortgage amount.

What Are Origination Points?

The first variety of “points” you’re likely to encounter with your mortgage are origination points. This is a fee you pay to the Mortgage Company or broker for their part in “arranging” your loan. Origination points are not set by the lender and vary from one mortgage broker to the next. This fee is not the only form of compensation that your broker receives; mortgage brokers will also mark up your interest rate to get a commission from the wholesale lender. Because you’re already paying the mortgage broker a fee this markup is completely unnecessary and you should simply refuse to pay it. This unnecessary markup is called Yield Spread Premium and avoiding it is the topic of the free video tutorial available on this site. A reasonable fee to pay for mortgage origination is one percent of your loan amount and not a penny more.

What Are Discount Points?

Discount points are paid to your lender at closing in exchange for something. That something could be a lower mortgage interest rate, or is simply paid as a condition of qualifying for your loan. Your lender might require that you pay two points to qualify for a $150,000 mortgage; in this case you would be required to pay 2% of $150,000 or $3,000 at closing. If your lender does not require you to pay points you might consider paying points to lower your mortgage interest rate.

There are pros and cons to paying points to your lender in exchange for a lower mortgage rate. One disadvantage of paying this fee is that while it may lower your mortgage interest rate it does not lower your loan balance. You can generally expect that paying discount points will lower your mortgage rate by .25 percent for each point you pay. Remember that one point is one percent of your mortgage amount, due at closing. Whether or not it makes sense to pay discount points in your situation depends mainly on how long you plan on keeping the loan.

There are other advantages to paying discount points. The IRS considers discount points to be prepaid mortgage interest and you will be able to deduct part or all of your points depending on IRS rules for your situation. Before deciding if paying points makes sense you should determine how long it will take you to recoup the expenses based on the savings you’ll get from a lower mortgage payment. The longer you plan on keeping the loan the more sense it makes to pay points and recoup your expenses. You can learn more about your mortgage options with my free video toolkit. Register today with the link at the top of this page.

If you are considering mortgage refinancing, there are several steps you can take to qualify for a better mortgage rate. Many people will tell you comparison shopping is the most important aspect of qualifying for a great rate; however, comparison shopping is only one aspect of the equation. Here are several tips to help you qualify for a better interest rate when mortgage refinancing.

I. Boost Your credit score

Mortgage lenders use your credit score to determine how much of a risk you are for a mortgage loan. Your credit score is derived from your credit reports maintained by the three credit reporting agencies: Equifax, Experian, and Trans Union. The first step in improving your credit score is to request copies of your credit reports and carefully check for any errors or negative information.

Your credit score relies heavily on your payment history; 35% is based solely on making on time payments to your existing creditors. If you have credit problems in your past be upfront with your lender and explain why the payments were late. Any documentation you can provide to support your explanation will help your cause.

II. Consider Buying Your Mortgage Rate Down By Paying Points

Most mortgage lenders will lower your mortgage rate in exchange for points. A “point” is one percent of your mortgage rate in the form of pre-paid interest due at closing. The more points you pay upfront, the more your interest rate goes down. When deciding if you will benefit from paying points determine how long it will take you to recoup the expense from the amount you are saving with a lower mortgage payment. This will tell you the “break even point” and if paying this fee makes sense for you.

III. Avoid Paying Yield Spread Premium

Mortgage companies mark up your mortgage rate because the wholesale lender pays them a bonus for overcharging you. For every quarter percent you agree to overpay the lender pays them one percent of your loan amount in addition to the origination points you already pay. How can you avoid paying this retail markup of your interest rate? Ask your mortgage company to see the mortgage rate guaranteed by the wholesale lender and tell them you will not pay any retail markup of the interest rate from the wholesale lender. If the mortgage company refuses to show you the rate sheet find another mortgage company that will.

You can learn more about your mortgage refinancing options, including costly mistakes to avoid by registering for our free, six part video tutorial.