Mortgage Refinance Guide

If you’re considering refinancing your mortgage for any reason and are thinking of taking out the new loan from your bank, there are several very good reasons why you should not do this. While it’s true that mortgage brokers have a reputation for overcharging their customers, banks are actually worse due to loopholes the laws requiring lenders to disclose their profit margins. Here are several tips to help you avoid paying too much when refinancing your home mortgage loan.

Real Estate Settlement Procedures Act (RESPA)

You might have heard of the Real Estate Settlement Procedures Act which requires mortgage lenders to disclose their fees and markup. What you might not know is that thanks to the Banking Lobby your bank is exempt from this legislation and not required to disclose any this information to you. Banks take full advantage of this loophole in the law by charging their customers the interest rate markup known as Service Release Premium. Fortunately, once you understand how wholesale mortgage rates work this markup is easy to recognize.

What is Service Release Premium (SRP)?

Banks are in the mortgage business to make money. Banks know the rates that other lenders offer and they know the rate you could get from a wholesale lender. The mortgage rate your bank offers is marked up to include Service Release Premium.

This is a “premium” mortgage rate and is designed to boost the banks profits when your mortgage loan is sold to investors. Once you close on your mortgage the bank immediately turns around and sells your loan on the secondary market.

Banks know that loans with above market mortgage rates bring them higher profits and this is why Bank mortgage rates will never be competitive. Banks rely on the fact that the majority of homeowners do not understand mortgage rates and that they are exempt from the Real Estate Settlement Procedures act to fleece their customers out of thousands of dollars.

Don’t Trust Your Banker’s Rate Sheets

Most bank employees have never heard of Service Release Premium and will swear to you that their rates have not been marked up. They will even show you the Bank’s rate sheets for that day claiming that their rates are competitive. The problem with the Bank’s rate sheets is that they already have Service Release Premium built into them. Only by comparing the banks rates to the wholesale mortgage rates offered by a broker can you spot the bank’s markup. Because the bank is not required to disclose their markup of profit margin for your loan you will never know exactly what your bank is charging.

Upfront Mortgage Brokers Can Save You Thousands

Most mortgage brokers do not offer their customers wholesale rates. Just like banks these mortgage brokers mark up the interest rate to earn a commission from the lender. When this markup is made by a mortgage broker it is called Yield Spread Premium. Because you are already paying this person an origination fee for arranging your loan, the markup is not only unnecessary, but is dishonest.

There are honest mortgage brokers willing to work for a one percent origination fee. These brokers are frequently called “Upfront Mortgage Brokers” because they disclose a flat fee upfront and do not charge Yield Spread Premium with their loans. You can learn more about refinancing your mortgage without paying Service Release Premium or Yield Spread Premium by registering for a free mortgage DVD.

If you purchased your home with an option adjustable rate mortgage because you needed the lowest payment possible you should be very concerned about all the trouble brewing in the mortgage industry. When your option ARM begins resetting coupled with the declining values of homes across the country it could become extremely difficult for you to keep up with rising mortgage payments. Here are several tips to help you decide if refinancing your option adjustable rate mortgage is right for you.

Payment Option Adjustable Rate Mortgages

Pay option mortgage loans are relatively new and offer a great deal of flexibility for the savvy homeowner or Real Estate investor. The problem is that many people who purchased homes with these loans don’t understand how they work and blindly go on paying the minimum amount due each month until the lender recasts their loan and find out that foreclosure is a short 120 days away.

If you’re reading this and are unfamiliar with payment option mortgages, they are a very flexible mortgage with several different payment options. Homeowners with these loans can make payments on any given month based on the following options:

15 year or 30 year amortization
Interest Only
Optional Minimum Payment

The first option is a fully-amortized payment meaning that portion is applied to your loan balance after the interest is paid. If you choose to make the interest only payment you will only pay the finance charges due each month without paying down your loan balance. The “optional minimum payment” is what gets homeowners in trouble. This payment does not cover all of the interest due in a month. The unpaid portion is added to the loan balance every month. This means that your mortgage is actually growing over time and when it reaches a certain threshold, usually 125% of your loan amount, the lender will “recast” your loan.

Recasting means that the mortgage is converted to a standard adjustable rate mortgage amortized for the time remaining in your loan contract. For many homeowners this results in payment shock that they are unable to recover from and ultimately lose their homes.

Are You Running Out of Options?

If you are a homeowner who has been making the minimum payment month in and month out you should refinance your loan immediately. Your option mortgage is a ticking time bomb that could cost your home. The payment option mortgage problem is not limited to homeowners with poor credit; industry analysts estimate that there are 580 billion dollars in outstanding option loans from 2005 and 2006 alone. Analysts expect many of these loans to end in foreclosure due to declining home values.

Protect Your Home

How can you protect yourself from mortgage payment shock with your option mortgage? Use a mortgage calculator to predict your monthly payment when your loan resets. Read your mortgage contract and find out what the lender’s margin is when calculating your future payment amounts. If you find that you will not be able to afford the payments after the reset consider refinancing with a hybrid adjustable rate mortgage to keep your payments low and lock in your mortgage rate for the time being.

You can learn more about your mortgage refinancing options; including costly pitfalls to avoid when dealing with mortgage brokers with a free mortgage DVD. Request yours today.

Many homeowners have never heard of Yield Spread Premium and do not understand why their mortgage rate is marked up. Yield Spread Premium sounds complicated; however, once you understand why it’s there, you can avoid paying this unnecessary markup. Cutting the fat from your mortgage rate by as little as a quarter point can lower your monthly payment by hundreds of dollars in many cases. Here are the basics you need to understand about Yield Spread Premium and mortgage interest rates.

Why Yield Spread Premium?

From the lender’s point of view this markup is all about return on investment. Wholesale lenders make the majority of their profits selling mortgage loans to investors on the secondary market. Mortgages with above market interest rates bring these lenders premium profits; this is why lenders incentivize overcharging homeowners with retail mortgage rates.

There’s a lot that goes on behind the scenes when your mortgage broker quotes you an interest rate. Once your broker understands your financial situation they’re sizing you up much like a used car salesman does when you walk onto the lot. Your mortgage broker knows the wholesale mortgage rate you qualify from the wholesale lender; however, the broker wants to up sell you on a higher mortgage rate because of this incentive from the wholesale lender. Here’s an example to illustrate how Yield Spread Premium works.

Suppose you are refinancing your 1st and 2nd mortgage loan for a total of $250,000. You wanted to consolidate these two mortgages with a lower interest rate and one payment. The broker tells you that you qualify for a 6.75% fixed rate loan and charges you 1.5 points for the origination fee. One point in this example is $2,500 as a point equals one percent of your loan amount. What your mortgage broker isn’t telling you is that you actually qualified for a 6.0% mortgage rate and they’ve marked it up for a commission from the lender.

In this example the mortgage broker receives $3,750 from you in origination fees. This is compensation for their work in arranging your mortgage; however, a reasonable amount to pay is no more than one percent. In this example 1.5 percent is too much. In addition to overcharging you for origination fees, the mortgage broker receives a commission from the lender for inflating your interest rate. In this example the broker pockets an additional 3.0%, or $7,500 for overcharging you. This fee is Yield Spread Premium. The broker walks away with $11,250 at your expense for little more than a few hours work.

Yield Spread Premium is Dishonest

The overwhelming majority of mortgage brokers will never admit what they’re doing with your mortgage rate. Those that do often become defensive and even angry about any questioning regarding this fee; they will tell you “since the fee isn’t coming out of your pocket don’t worry about it.” The fact of the matter is this fee is advantageous and dishonest. A bill is currently making its way through the House of Representatives making Yield Spread Premium illegal. If this happens how will your mortgage broker afford their boat payments? Too bad for them.

Until Yield Spread Premium is illegal, savvy homeowners who learn to recognize this unnecessary markup can avoid paying it when refinancing. By avoiding Yield Spread Premium you’ll be able to refinance with wholesale mortgage rates, potentially lowering your monthly payment amount by hundreds of dollars. Refinancing with a wholesale mortgage rate isn’t as difficult as you think. You’ll need to find a mortgage broker willing to work for the origination fee alone, without receiving the kickback from the wholesale lender. Honest mortgage brokers do exist; however they can be difficult to find.

How to Find an Honest Mortgage Broker

Your best bet in finding an honest person to originate your mortgage is to look for a local, self-employed broker. A representative a large brokerage house may not have the authority to refinance your mortgage without Yield Spread Premium; in this case mom and pop shops can be the best way to go. Start by contacting local mortgage brokers in your phone book and telling them that you are looking for a mortgage without Yield Spread Premium. Explain that you understand how the markup works and are willing to pay a reasonable origination fee for their work; however, you will not accept a higher mortgage rate for any lender paid compensation. Once you find a mortgage broker willing to work for an origination fee alone you are well on your way to saving thousands of dollars on your next mortgage.

If you’re in the market for a new mortgage loan there are several things you need to know in order to avoid paying too much. Many of these so called “secrets” are things your mortgage lender and broker don’t want you to now and certainly don’t want to talk about. Here are several of the so called industry “secrets” to help you avoid overpaying for your next mortgage loan.

Your Mortgage Broker’s Dirty Little Secrets

Mortgage brokers receive compensation for arranging your mortgage from two sources. Mortgage brokers charge you an origination fee for their services; this includes placing you with a lender, agreeing on loan terms and interest rates, and insuring the lender’s underwriter has all of the necessary loan documents and disclosure statements. A reasonable fee to pay for your mortgage broker’s services is one percent of your mortgage amount; however, many broker try and charge you as much as three and four percent.

What your broker isn’t telling you is that he or she is making money on the back end of your mortgage from the lender. Your broker marks up the interest rate you qualify for a commission from the wholesale lender. Wholesale lenders pay the broker a bonus for overcharging you because loans with above market mortgage rates bring them larger profits when your loan is sold on the secondary market.

For every .25% that your broker overcharges you on your mortgage rate the lender pays one percent of your mortgage in commission. Your broker will never tell you that they’re doing this; in fact, many brokers become defensive and even angry when questioned about Yield Spread Premium. Why wouldn’t they react angrily when Yield Spread Premium effectively doubles, even triples the compensation they receive for your loan. The problem is that while your broker may not lie to you directly, deception by omission is still a lie.

By accepting an above market mortgage rate that has been marked up by your mortgage broker you could be paying hundreds of dollars in unnecessary finance charges every month that you keep the loan.

You Can Avoid Paying Yield Spread Premium

Homeowners who understand how mortgage brokers are compensated can avoid this unnecessary markup of their mortgage rates and refinance with a wholesale interest rate. You can start by telling your mortgage broker that you understand how Yield Spread Premium works and will not accept any mortgage that includes this markup. Ask your mortgage broker to see the rate sheet from the wholesale lender and do not accept any rate sheet that appears on your mortgage broker’s letterhead.

Many brokers leave their markup off the Good Faith Estimate to make their loan offers seem more attractive. Your broker is required to list this markup on your HUD-1 statement but will try and disguise it. The Good Faith Estimate and HUD-1 statement look very similar and if Yield Spread Premium is part of your mortgage rate you will find it around lines 810-813 on these documents. You may see it called YSP, Yield Spread Premium, Premium paid to broker, or some variation but the fee will always be a percentage of your loan amount.

If you question your mortgage broker about this markup many will tell you not to worry about the fee because it’s not coming out of your pocket. The problem with Yield Spread Premium is not whose pocket this fee is coming from but the reason it’s being paid. Lenders reward brokers for overcharging you with your mortgage rate; if you accept a loan that includes Yield Spread Premium you’re paying more than you have to for your home loan.

Beware Mortgage Broker Junk Fees

There are a number of fees on your HUD-1 and Good Faith Estimate that are not charged by lenders but your broker will represent as lender fees. Take the lock fee for example. Your broker might charge you a fee for “locking in” your mortgage interest rate; however, wholesale lenders do not charge the broker a fee for locking in a mortgage rate. Other garbage fees your broker might try to pawn off on you include broker courier fees, application fees, and processing fees. If you find these fees on your Good Faith Estimate or HUD-1 statement you should confront your mortgage broker about these garbage fees.

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

If you’re in the process of refinancing your home mortgage, you might be wondering what type of interest rate is right for you. There are two basic types of mortgage rates to choose from when refinancing your home. In a previous article I discussed the pros and cons of Adjustable Rate Mortgages; today we’ll discuss the merits of refinancing your home loan with a fixed rate mortgage.

What Are Fixed Rate Mortgage Loans?

Fixed rate mortgages are simply mortgage loans with a contracted interest rate that does not change for the entire duration of your loan. This means that your mortgage payment will never change due to market or economic conditions. Your interest rate and payment amount are “locked-in” as long as you keep the loan.

What are the Advantages of Fixed Rate Mortgage Loans?

While it’s true that fixed rate mortgages typically come with higher interest rates than a similar Adjustable Rate Mortgage, the amount of risk associated with these loans is significantly lower. Because Adjustable Rate Mortgages change their interest rate and payment amounts over time you’ll always run the risk of payment shock. If you have a low tolerance for financial risk and need a mortgage payment that you can plan your budget around consider refinancing with a fixed rate mortgage.

If you are an individual that takes chances with your finances you could benefit from an Adjustable Rate Mortgage. These mortgages come with much lower payments and when used correctly you can minimize the risk. Adjustable Rate Mortgages are great for homeowners that need short term financing with an ultra-low payment. There are a number of choices for your Adjustable Rate Mortgage including interest-only and option mortgages. You can learn more about choosing the best Adjustable Rate Mortgage for your situation with my free mortgage tutorial.

How Your Interest Rate Determines Your Mortgage Payment

There are two factors that determine your mortgage payment amount. These factors are the mortgage rate you qualified and the term length you choose when refinancing. Term length is the amount of time you have to repay your mortgage and determines your loan’s amortization schedule. The length of term you choose is inversely proportional to your payment amount. Loans with short term lengths have higher payments and those with long term lengths have lower payments. If you need the lowest possible mortgage payment there are now loans available with 40 and 50 year term lengths.

Choosing the best type of mortgage rate for your situation should be an easy decision. Finding a loan originator that will not charge you Yield Spread Premium when refinancing your loan will be much more difficult. Yield Spread Premium is the unnecessary markup of your mortgage interest rate to give your mortgage broker a bonus and is the reason most homeowners in the United States overpay for their mortgage loans. You can learn more about your mortgage refinancing options, including expensive pitfalls to avoid with my free video tutorial. You can register today for free by clicking the DVD image at the top of this page.