How to Refinance a Mortgage

Are you a homeowner in need of cash and are considering taking out equity in your home? Borrowing against your home’s equity is a way to consolidate bills, pay medical or educational expenses, or make home repairs. Understanding the different types of home equity loans will help you avoid paying too much for the financing; here are several tips to help you decide if borrowing against your equity is right for you.

Cash Out Mortgage Refinancing

Refinancing your home with cash back means taking out a new mortgage to pay off your existing loan while borrowing more than the payoff balance of your loan. The difference between your payoff balance and the amount you borrow will be paid to you in cash at closing. Cash back refinancing is great for homeowners who have a significant amount of equity to borrow against or if you need to improve the terms of your existing mortgage. It is important to remain in your home long enough to recoup the expenses from refinancing your existing mortgage.

Second Mortgage Loans

Taking out a second mortgage will get you a higher interest rate than if you were refinancing with cash back. The reason for this is that your home will be secured by two loans often from different lenders. The second lender shoulders more risk than the first and will pass that risk on to you the borrower with a higher mortgage rate. Second mortgages cost less in upfront fees than refinancing; however, because the loan is secured by your home the rates are typically lower than signature loans or credit cards.

Home Equity Lines of Credit

Using a Home Equity Line of Credit allows you to borrow as you need money and have the advantage of paying interest only on the loan’s balance. A home equity line can be an extremely flexible and many offer debit cards for ease of access to your funds. There is additional risk involved with a Home Equity Line of Credit as the ease of access to your equity may result in borrowing more than you intended. If you have difficulty managing your money this might not be the best loan for you.

Tax Deductible Interest

The interest you pay on cash out refinancing or home equity loans is typically tax deductible. If you borrow more than your home is worth or if you have second mortgages for more than $100,000 the IRS could deny your deduction.

Is a Home Equity Loan Right For You?

Make sure the reason you are borrowing warrants dipping into your equity. While the equity in your home belongs to you, it doesn’t make sense to borrow for something like a vacation or to purchase an automobile. If you need cash for some financial goal or to make improvements to your home or even start a business, cashing out your equity could be a wise financial decision. Remember that your home should not be the piggybank you dip into whenever you need a cash fix.

If you are in the process of refinancing your home and are searching for information about mortgage rates there are several things you need to know about the rate quotes you receive. Most homeowners don’t realize that 90% of the rate quotes they receive from mortgage brokers and on the Internet include commission based markup included to make someone money from your loan. Understanding mortgage quotes and learning to recognize this markup will help you avoid paying too much for your next mortgage loan.

Today’s 30 Year Fixed Rate

The 30 year fixed mortgage rate has been creeping up slightly to 6.0%. This rate does include Yield Spread Premium which is intended to give a commission to the person arranging your loan. Yield Spread Premium by itself is not necessarily a bad thing; only when it is abused could you wind up paying hundreds of dollars a month unnecessarily.

What is Yield Spread Premium?

Yield Spread Premium is a percentage of your loan amount created when the mortgage company or broker arranging your loan locks and closes with a higher than market interest rate. Suppose your lender approves you for a mortgage rate of 6.0% but the broker closes you at a higher rate of 6.5%. This creates .5% of Yield Spread Premium and brings the broker a commission of 2% of your loan amount. Did your mortgage broker overcharge you? It depends on how your loan was structured and whether or not the broker told you they were marking up your mortgage rate.

Mortgage Broker Compensation

Brokers are compensated in two ways. They can charge you an origination fee for their part in arranging your loan or receive compensation from the lender with Yield Spread Premium. If the broker is charging you an origination fee for their services a reasonable fee to pay is 1-1.5% of your loan amount. Mortgage brokers typically receive one percent of your loan amount for every .25% your loan closes about the interest rate offered by the lender. If this is paid in lieu of an origination fee or used to pay your closing costs Yield Spread Premium can be a good thing; however, it is often abused when the broker charges you an origination fee and pockets Yield Spread Premium without your knowledge.

You can learn more about refinancing your home loan without paying too much in broker fees including ways to recognize and avoid lender junk fees by registering for my free video tutorial.

If you’re considering refinancing your home loan, finding the best lender is probably at the top of your to-do list for the loan. Finding the best lender will help you get the lowest mortgage rate refinancing your loan. Here are several tips to help you get the best mortgage rate refinancing your home without paying commission based markup or junk fees.

Avoiding Commission Based Markup

If your goal for the new home loan is to get the lowest rate possible you’ll need to get a wholesale mortgage rate. The only way to get a wholesale mortgage rate is to find the right mortgage broker who is willing to give you access to wholesale rates for a reasonable fee. How do wholesale rates work? Only mortgage brokers have access to these rates; you’ll never get wholesale from bank, credit union, or broker bank.

The problem with using a mortgage broker to refinance your mortgage is that most brokers rely on commission based markup of your interest rate as a source of income. You’re already paying a perfectly reasonable origination fee for their services; why accept a higher mortgage rate just to give your mortgage broker a commission?

This commission based markup of your mortgage rate refinancing is called Yield Spread Premium and you’ll need to avoid this markup to get the lowest possible rate.

How do you get the best mortgage rate refinancing your home? Find a mortgage broker willing to work for a one percent origination fee without tacking Yield Spread Premium to your loan. These people are out there…they are typically self-employed mortgage brokers that run their own businesses without staff or posh offices. The key is to find a mortgage broker that doesn’t employ a sales staff. These brokers always split their commissions with their salespeople are will not typically negotiate over Yield Spread Premium. The same is true of a large brokerage house…the owner is always going to want their cut.

You can start your search by checking the website of the Upfront Mortgage Broker Association. (upfrontmortgagebrokers.org) Their website lists their members by Sate and all of the brokers agree to run their businesses by certain professional and ethical standards. When you contact these brokers ask them how long they’ve been originating loans. You’re looking for ten years or longer and someone that is the owner of their business. Make sure they close your loan in the name of the wholesale lender and not their own company. Brokers that close in their own companies name fund their own loans and are not required to disclose their profit margin or markup under the Real Estate Settlement Procedures Act. This is the same reason you should never refinance your home loan with a Bank or Credit Union.

When addressing Yield Spread Premium, make sure your broker will not include this in your loan and is willing to show you the rate lock confirmation from the wholesale lender. This document provided by the lender is proof that your broker is not receiving Yield Spread Premium for marking up your rate. If the broker is unwilling to provide you this document he or she is hiding the fact that Yield Spread Premium is a part of your loan and cannot be trusted. You can learn more about getting the best mortgage rate refinancing your home and expensive pitfalls to avoid by registering for my free video tutorial.