How to Refinance a Mortgage

If you’re considering a “no cost” or “no fee” mortgage loan for your home loan there are several things you need to know about these loans to avoid paying too much. Whenever lenders talk about “no fee” mortgage loans they are always trading off a higher mortgage rate in exchange for lender fees paid at closing. Here are several tips to help you avoid falling for the “no closing cost” lie with your home mortgage loan.

What are no cost mortgage loans? No closing costs loans are simply a gimmick to get your business. There will always be third party closing costs that cannot be waived…if your lender is “waiving” these costs they may be paying them for you; however, they will mark up your mortgage rate to cover the cost.

When you take out a mortgage the person arranging your loan typically slips .50 to .75 percent markup of your interest rate to get a commission. If you take out a no cost mortgage you will have this markup plus as much as a full point markup from the lender. This higher mortgage interest rate can result in paying hundreds of dollars extra each month that you keep the loan. This is true of both the mortgage lenders and banks you see offering “no closing cost mortgages” as well as the “flat fee” loans.

Suppose you take out a $350,000 mortgage to purchase your home. The mortgage rate you qualify for paying your closing costs is 6%; however you elect to take a 6.75% mortgage to avoid paying closing costs. Your monthly mortgage payment at 6.75% on a 30 year fixed rate loan will be $2,270 per month. If you paid the closing costs upfront your monthly payment at 6% would have only been $2098. That’s an extra $2,064 you’ll pay every year you keep the loan.

In five years this “no fee” mortgage has cost you a whopping $10,320…money you’d still have in your pocket had you elected to pay your closing costs up front. You can learn more about saving money on you home loan while avoiding unnecessary markup of your mortgage rate and garbage fees with my 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.

You’ve probably seen the television ads claiming that no cost mortgage refinancing is “a no brainer.” Advertisers love to claim that they’ll pay your closing costs and offer zero cost refinancing. Most homeowners responding to these offers don’t realize how much of a lie no cost refinancing is. Here is the truth you need to know about the no cost mortgage refinancing lie.

Most homeowners don’t understand how mortgage lenders make their money. The majority of lenders today don’t sit on your loan collecting interest month in and month out. Most lenders make their money by selling loans to investors on the secondary market; the profit they make by selling your loan is called Service Release Premium. The fact that lenders sell your mortgage loan has more to do with you than you think; lenders reward brokers for charging you an above market interest rate to boost their profits when the loan is sold.

Your mortgage broker simply acts as an agent reselling loans for a wholesale lender. Mortgage brokers mark up the interest rate you qualify because the wholesale lender pays them a bonus for every .25% they overcharge you. This means the loan you get is anywhere from 100 to 150 basis points higher than what you could have had. This is why the average homeowner gets a retail rate on their mortgage loan. The interest rate has been marked up to give the broker a bonus.

The problem with this markup is that most brokers do not tell you what their doing and frequently omit what they’re doing on your Good Faith Estimate. Because you’re already paying your mortgage broker a fee for originating your loan any markup of your mortgage interest rate for a commission is not only unnecessary, but is taking advantage of you as a consumer.

In addition to marking up your mortgage interest rate for a profit, many brokers invent fees when processing your loan. These junk fees are often for thinks like “locking in your mortgage rate,” “application fees,” and “courier fees.” Most of these junk fees go straight into your mortgage brokers pocket for no good reason. So what about these companies claiming to offer no fee mortgage loans?

No Fee Mortgage Refinancing is a Lie

The truth is that every mortgage has legitimate fees that must be paid. If the lender is paying these fees upfront they are being paid on the back end in the form of Service Release Premium. When you refinance your mortgage with a “no fee” mortgage you’ll be accepting a much higher mortgage rate meaning that you’ll pay more than you need to for the loan. The lenders know they’ll make up the fees they’ve paid for you and double, even triple their profits when the loan is sold on the secondary market. You’ll be stuck paying hundreds of dollars more each month while the lender makes a handsome profit selling your loan. You can learn more about your refinancing options, including expensive pitfalls to avoid with this free mortgage tutorial.

Everyone has seen the ads on television, or heard about some bank testing a “no closing cost” mortgage loan, but aren’t these loans just a gimmick to reel you in? Truth be told there is no such thing as a “no cost mortgage;” you always pay one way or another. One way mortgage companies and banks offer no ost loans is by talking about their charges and no one else’s. This could refer to processing or origination fees and not the third party settlement charges due at closing.

There is usually an asterisk associated with these offers and a lot of fine print indicating that other fees will apply. Other offers might state”no lender fees” and while this is much closer to the truth borrows should know they make up the difference elsewhere. A true no closing cost loan would mean that you do not pay for anything. Attorney fees, credit checks, title insurance, and all settlement fees would be paid for you. The problem is there are a lot of third party companies involved and someone has to pay them for their services.

If you don’t pay third party companies involved with your mortgage, it means the lender will have to pay them. When the lender pays the settlement charges, you pay the lender in the form of a higher interest rate. You pay a higher mortgage rate in exchange for the mortgage company paying your closing costs. Is this a no cost mortgage loan? Not when you’re paying that higher interest rate for the entire duration of your loan.

You can learn more about your mortgage options, including costly mistakes to avoid with our free mortgage video tutorial.