How to Refinance a Mortgage

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.

Points are one of the most misunderstood aspects of mortgage loans. In the simplest definition mortgage points are a percentage of your loan amount due at closing for one of two possible reasons. Here are the basics you need to know about mortgage points and how you can decide if paying them is worthwhile when refinancing your home mortgage loan.

Types of Mortgage Points

Mortgage points come in two flavors. One point is equal to one percent of your mortgage amount and is the fee you’ll be required to pay at closing. There are the discount points you pay to the lender in exchange for a lower mortgage rate and the origination points you pay to the broker for their part in arranging your loan. Brokers and lenders do not always require that points be paid; however, some lenders hide their point requirements in the fine print hoping to distract you with an unnaturally low mortgage rate.

If you don’t agree to pay the points required for that low mortgage rate you’ll find the actual interest rate is often much higher than the going market rate. This is a common bait and switch tactic used by mortgage lenders to boost their profits. Fortunately once you understand how points work this is an easy scam to avoid.

Should You Pay Mortgage Points?

Deciding whether or not paying points to the lender is in your best interest depends on how long it will take you to recoup the expense based on the lower monthly payment you are getting. We’ve all seen the commercials on television promising insanely low rates with a lot of very small print flashed up on your screen. If you pause the commercial and squint you can just make out that this lender requires two points at closing to qualify for this low rate. Does it make sense to pay the fee?

You can easily determine this with a simple mortgage payment calculator. First compare the lower payment with points to the higher payment without points. The difference between the two payments is your monthly savings. Suppose you were refinancing a $200,000 loan with this lender. Two points would amount to $2,000 due at closing. If the monthly payment is $35 lower it will take you almost five years to recoup this expense. If you plan on staying in your home for the long term paying points can be beneficial; however, if you sell your home before this you’ll be losing money by paying points.

What About Origination Points?

Mortgage brokers often charge origination points for their part in arranging your loan. Not every mortgage charges origination points as brokers can receive compensation from the lender behind your loan. If your broker is charging you a fee for arranging your loan a reasonable fee to pay is 1-1.5% of your loan amount. You can learn more about your mortgage refinancing options including costly mistakes to avoid 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.

The mortgage quotes you receive when shopping for a new lender do not give you the actual interest rate you qualify when refinancing. The rate quotes you get are “retail” mortgage quotes that include unnecessary commission based markup. Here are several tips to help you understand how mortgage rates are quoted so you can refinance with the actual mortgage rate you qualify.

Mortgage Yield Spread Premium

The commission based markup of your mortgage rate is called Yield Spread Premium and you can avoid paying it by understanding mortgage quotes and learning how to read lender rate sheets. In order to understand how commission based markup works it is helpful to understand how mortgage brokers and other loan originators are compensated.

Mortgage Broker Compensation

Mortgage brokers are compensated for their work from two sources. You will be required to pay the broker a fee for their part in arranging your loan. This fee is commonly called an origination fee or origination points and should not be more than one percent of the amount you are refinancing. The second method is the so called “lender paid compensation,” or Yield Spread Premium. This fee is paid by the lender as an incentive for overcharging you. For every .25 percent your broker inflates your mortgage rate they receive one percent of your loan amount in lender paid compensation.

Why do lenders reward mortgage brokers for overcharging you? The majority of profit for a lender comes from selling mortgage loans to investors on the secondary market. Mortgage loans with above market interest rates bring premium profits for the lenders and this is why your broker is rewarded for overcharging you.

How Mortgage Rates Are Quoted

Every wholesale lender publishes their rate sheets by fax or online each day. Mortgage brokers use these rate sheets to quote you a rate; however, the quote you get is not based on your credit or financial details as you might expect. Your mortgage quote is based on how much the broker thinks you’re willing to pay in addition to the mortgage rate you qualified. Just like a used car salesman your mortgage broker quotes you an interest rate with their commission check in mind.

How to Avoid Yield Spread Premium

Most homeowners unknowingly agree to retail mortgage rates without knowing their broker marked up the interest rate. This amounts to paying thousands of dollars unnecessarily over the lifetime of the loan. Yield Spread Premium is a completely unnecessary fee because you are already paying a perfectly reasonable origination fee for your mortgage broker’s services. Homeowners who learn to recognize this markup can find honest mortgage brokers and negotiate to avoid paying it. This is much easier than it sounds and you can save yourself thousands of dollars refinancing with a wholesale mortgage rate.

How to Recognize Yield Spread Premium

Many mortgage brokers become defensive when asked about Yield Spread Premium. If your broker gets angry or tells you not to worry about the fee because it’s being paid by the lender you are probably dealing with a dishonest person. Tell your prospective mortgage brokers that you understand how Yield Spread Premium works and will pay a reasonable fee for their services but will not accept loan offers with this “lender paid” compensation.

Ask your mortgage broker to show you the rate sheet from the wholesale lender on the day you lock in your rate. Make sure the rate sheet comes from the lender and is not something typed up on the mortgage broker’s letterhead. If the broker refuses to show you the rate sheet or makes excuses this person is not being honest with you; find another mortgage broker that will be.

You can learn more about your mortgage refinancing options, including costly pitfalls to avoid with a free mortgage DVD.

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.