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.

No fee mortgage refinancing sounds like a great deal; however, as most homeowners quickly learn, there are no free lunches when it comes to your mortgage loans. Most of the so called “no fee” mortgages you see advertised simply trade off a higher mortgage rate for the lender’s share of closing costs. Every mortgage has fees, the difference is you can choose to pay these fees now or keep paying them for the entire duration of your loan.

There are several circumstances where no fee mortgage refinancing can be used to your advantage. You can use Yield Spread Premium (YSP) to pay your fees if you’re in a pinch and need to refinance. This is an expensive way of paying your closing costs and may not work in every situation; however, if it helps you save your home from a risky adjustable rate mortgage the tradeoff will be worth it.

If you’re not already familiar with Yield Spread Premium it is the markup your mortgage broker adds to your interest rate to get a commission from the lender. When a wholesale lender approves your mortgage you qualify for a specific mortgage rate. Your broker knows this rate but most will quote you a higher interest rate without telling you what you’ve qualified, pocketing the commission from the lender at your expense.

An honest mortgage broker has the ability to structure your loan where the commission from the lender is used to pay your closing costs. Sure, you’re accepting an above market interest rate; however, for every .25% you agree to pay above the mortgage rate you qualified the broker gets 1% of the loan amount back. You’ll have to pay the broker an origination fee for their services; however, Yield Spread Premium can be used to pay your refinancing expenses. Here’s an example of how Yield Spread Premium can be leveraged to your advantage.

Suppose you qualify for a 6.0% mortgage rate when refinancing your loan from the wholesale lender. If you agree to pay 6.75% your broker will receive a commission of 3% of your mortgage amount. On a $200,000 mortgage the Yield Spread Premium in this example provides $6,000 which is more than enough to cover your closing costs. This assumes you’re working with an honest mortgage broker that agrees to let you use this money to pay your closing costs.

You can learn more about your mortgage refinancing options, including costly pitfalls to avoid with my free mortgage toolkit; register today, the video tutorial is yours free with no obligation.

Several national banks have recently been bragging about their “no fee” mortgage loans. The problem with these “no fee” mortgage loans is simple: banks are exempt from the Real Estate Settlement Procedures Act. In 1999 the Banking Lobby had our nation’s disclosure laws changed to exclude themselves from legislation that requires mortgage lenders to disclose their profit margins. Because your Bank is not required to disclose their profit margins you will never know how much they have marked up your mortgage interest rate. If you want to avoid overpaying for your mortgage you should never take out a mortgage loan from a bank.

What can you do if you really need one of these “no fee” mortgage loans?

No fee mortgages are useful for people that don’t have the required for closing costs. The problem with most of these loans you see advertised is that the tradeoff for not paying your closing costs is a significant increase in your mortgage rate. The lender jacks up the interest rate promising that you’ll be able to refinance in three years to a much lower rate. You should know that any lender that encourages you to refinance on a regular basis is engaged in predatory lending practices.

There are ways to broker “no fee” mortgages yourself if you understand how mortgage brokers make their money. If you’re a regular reader of this column you should have a good understanding of Yield Spread Premium; however, for the casual reader I’ll give a brief introduction. Yield Spread Premium is the difference between the wholesale mortgage rate you qualified and the interest rate your loan representative locks and closes your mortgage. The wholesale lender pays your mortgage broker one percent of your loan amount for every quarter percent you pay above the rate you qualified.

Should an honest mortgage broker keep this money? You’re already paying them origination fees for their services; what if you asked them to use that money to pay your closing costs? Tell your mortgage broker that you’ll pay a .25% higher mortgage rate if they’ll credit that money from the lender to your closing costs. Sounds too good to be true? Find an honest mortgage broker and you’ll save yourself thousands of dollars doing your “no fee” mortgage this way rather than with that Bank you see bragging about their loan offerings.