Mortgage Refinance Guide

Most homeowners know very little about how mortgage brokers are compensated for their work.

They assume that the origination fee listed on their Good Faith Estimate is the broker’s commission for the home loan; however, what you don’t know about mortgage broker fees could cost you a lot of money.

Here are several tips and questions to ask potential brokers to help you find the right professional to refinance your home loan.

The mortgage industry in the United States has a dirty little secret known as Yield Spread Premium. Mortgage brokers are very good at explaining away this fee as “lender paid” compensation; in other words it’s not coming out of your pocket so don’t worry about it. The problem with Yield Spread Premium, which is a percentage of your loan amount created when the broker locks and closes your home loan with an above market interest rate, is that it really is costing you money…thousands of dollars in unnecessary finance charges every year that you’ll pay as long as you keep that loan

Yield Spread Premium is a Lie

Your mortgage broker pockets a commission from the lender for marking up your mortgage interest rate. Sure this is listed on the HUD-1 statement as a “broker rebate” but if your broker doesn’t tell you they’ve marked up your interest rate for cash it’s still a lie of omission. Your mortgage broker receives one percent of your loan amount for every quarter percent they overcharge you. This “rebate” is paid in addition to any origination fees or mortgage broker fees you’re already paying.

Mortgage Refinancing Done Right

Another problem faced by the majority of homeowners refinancing their mortgages is that they don’t know what a good deal looks like. The ideal transaction between a homeowner and a mortgage broker is a loan with zero Yield Spread Premium, no garbage fees, and a one percent origination fee. Think that this sounds too good to be true? It’s not if you know how to find the right mortgage broker to originate your loan.

Questions to Ask Your Mortgage Broker

Before you agree to anything with a mortgage broker there are several pointed questions you need to be asking:

Honest mortgage brokers willing to work for a one point origination fee do exist and finding a broker like this will save you thousands of dollars and countless headaches when refinancing your home. You can learn more about getting a wholesale mortgage rate while avoiding lender junk fees by registering for my free mortgage video tutorial.

You might hear people talking about Par mortgage rates from time to time but what does Par mean? Par simply means a mortgage rate with no discount points or Yield Spread Premium attached. This is the rate you want when refinancing or taking out a new loan to purchase your home. Here are the basics you need to know about Par rates and how you can get one.

Discount Points And Yield Spread Premium

When retail mortgage rates are quoted you may see them based on a certain number of “points.” Points, also called “Discount Points” are a fee you would be required to pay in order to qualify for a specific mortgage rate. One “point” is the equivalent of one percent of your loan amount and paying this fee is typically something you want to avoid; especially if you are trying to refinance with a wholesale rate. Points are easy enough to recognize because the lender tells you about them upfront; however, no one talks about Yield Spread Premium.

Yield Spread Premium is the markup your mortgage broker adds to get a commission from your lender. Lenders pay this “broker rebate” for closing loans with above market interest rates. They do this because the lender makes the majority of their profit by selling loans to investors on the secondary market…loans with above market mortgage rates bring the most profit.

If you want wholesale mortgage rates when refinancing your home loan you’ll need to find a mortgage broker willing to work for you without marking up your mortgage interest rate. You’ll have to pay a reasonable origination fee for their services; however, there are honest mortgage brokers out there who are willing to do this for you. You can learn more about mortgage shopping for par rates while avoiding garbage fees by registering for our free video tutorial.

Flat Fee Mortgage Refinancing

Companies like Ditech offer great rates on their websites…until you read the fine print. I was on Ditech.com earlier today and they were offering a 5% fixed 30 year rate which is actually lower than today’s par or wholesale rate. How are they able to do this?

Check out the fine print and you’ll find out that you have to pay two points just to get this rate. So much for the low, flat fee…read the fine print on other “no fee” mortgage offers and you’ll discover that you’re trading fees for a higher mortgage rate.

While no cost mortgage refinancing sounds like a good offer, the mortgage rate you’re getting isn’t just a quarter point higher than you’d pay otherwise…it’s often a full point higher. There are dozens of no cost mortgage offers out there but most of them are only disguising their fees. If you are truly in need of no cost financing there are ways for honest mortgage brokers to cover your expenses with a higher mortgage rate; however, in most cases this is just a marketing gimmick to sell you an overpriced loan.

Yield Spread Premium Can Be Used For Good…

There are honest mortgage brokers that will structure loans with a higher than market mortgage rate and use the broker rebate to pay closing costs. Many mortgage brokers pocket this rebate after marking up your rate without telling you; this abuse of is so bad that the Secretary of Housing and Urban Development acknowledged that Yield Spread Premium is responsible for homeowners overpaying nearly sixteen billion dollars a year.

The way Yield Spread Premium works is that your broker receives a rebate of 1% of your loan amount for every .25% you pay above the market or par mortgage rate. If you don’t have the money to pay your closing costs your broker can simply use the rebate to cover your expenses. Remember that you’re agreeing to pay a higher mortgage rate in exchange for your closing costs…you’ll have a higher mortgage payment and have to spend more on finance charges for the duration of your loan.

Refinancing your home with a no cost mortgage could result in a monthly payment that is several hundred dollars higher than you’d have if you paid the closing costs yourself. This is also true if you unknowingly agree to a mortgage that includes Yield Spread Premium, a problem that happens to the majority of homeowners in the United States. You can learn more about your mortgage refinancing options, including expensive pitfalls to avoid by registering for our free video tutorial.

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.

Yield Spread Premium or YSP is the best kept and most scandalous mortgage secret you’ll encounter as a homeowner. YSP is the premium that your lender pays to the mortgage broker for selling you a higher than necessary mortgage interest rate. The more you overpay when refinancing your mortgage, the higher your broker’s kickback from the lender will be.

Par Mortgage Rates

The wholesale mortgage rate you qualified when applying for your loan is known as the “par” rate. Premium or retail mortgage rates include the broker’s markup; here’s an example to illustrate how YSP works. Suppose in this example that you are refinancing your mortgage for $200,000. There are two mortgage rates associated with your new loan: 6.0% and 6.25%.

YSP is paid for by the lender in fixed increments. In this case the par amount you qualified (which your broker will not tell you) is 6.0%. The Yield Spread Premium for this example is .25%. For every .25% you agree to overpay the broker receives a commission of one percent of your mortgage amount. In this example the broker pockets $2,000 because you agreed to pay an above market interest rate.

Most mortgage brokers conveniently omit Yield Spread Premium from the Good Faith Estimate when providing you a quote. If your mortgage is being funded by a wholesale lender and not a bank, this markup of your mortgage interest rate will be disclosed on the HUD-1 statement. YSP can be found on lines 810-811 of the HUD-1 statement.

Avoid Banks and Correspondent Lenders

Banks and Correspondent lenders fund their mortgage loans in the name of their own companies and are not required to disclose this markup due to a loophole in the Real Estate Settlement Procedures Act. The markup by the bank or correspondent lender goes by a different name and is called Service Release Premium. Service Release Premium will not be listed on your Good Faith Estimate or HUD-1 Statement. If you refinance your mortgage with a bank or correspondent lender like E-Loan you’ll never know how much they’ve marked up the par mortgage rate you could have qualified for.

You can learn more about your mortgage refinancing options, including costly mistakes to avoid by registering for my free mortgage refinancing video tutorial. Register today with no obligation by clicking the DVD image at the top of this page.