Home Mortgage Refinancing Guide

Many homeowners rely on the Good Faith Estimate when comparison shopping for a mortgage loan. While it’s true that the Good Faith Estimate gives you more information than the Annual Percentage Rate (APR) there are important limitations you need to be aware of before choosing a lender based on this document. Here are several tips to help you choose the best loan offer when refinancing your mortgage.

How do you really know which mortgage is better when refinancing? Do you choose the loan with the lowest mortgage rate regardless of closing costs and other fees? Do you go with a lender claiming to offer no fee mortgage refinancing and hope that you’re getting a competitive mortgage rate? When it comes to refinancing your home the answers to these questions are not black and white but depend on your individual financial situation. In order to make sense of your options when refinancing it helps to understand how loan originators and mortgage lenders make their money.

The first thing you need to know is that mortgage loans are sold on a commission basis. Your loan officer or broker is not interested in giving you a fair and accurate mortgage quote whatsoever; this person is only interested in selling you the loan that nets them the largest commission. To accomplish this goal the Good Faith Estimate that they give you may provide very little truth about the actual costs involved with your loan.

Wait a minute, isn’t the Good Faith Estimate required by law? Mortgage lenders are required by law to provide you a copy of the Good Faith Estimate; however, this document is merely an “estimate” given in “good faith.” We all know that estimates have a nasty habit of changing before everything is said and done. Another problem with your Good Faith Estimate is that your loan officer or broker knows that most people have no idea what wholesale mortgage rates are, or even how they work. Because this person is paid by commission it’s not in their best interest to give you a good mortgage rate. The more you pay when refinancing, the more money they stand to make.

Because your Good Faith Estimate is just an estimate, like many other salespeople, loan officers and mortgage brokers tend to “stretch the truth” in order to get a sale. I say stretch the truth; however, in most cases this means flat out lie. These people know the wholesale rate that your lender approved you; however, they mark this mortgage rate up to get a commission from the lender. This markup of your mortgage rate is frequently omitted from the Good Faith Estimate entirely.

This is why most mortgage quotes you receive are anything but accurate.

Did you know that an honest mortgage broker needs 17 pieces of information before they can quote you an accurate mortgage rate? If your loan officer or broker is not asking you for the following information they are just feeding you a line to get your application processed.

Here is the information need to accurately quote a mortgage interest rate:

1. Loan Type: Mortgage Refinance or New Purchase
2. How Much Are You Borrowing?
3. If Purchasing, Do You Have a Down Payment?
4. What is Your credit score?
5. What Type of Property Do You Have?
6. Will You Be Taking Cash Back?
7. What is Your Employment Status?
8. What is Your Property Address?
9. Is Anything Being Paid in Escrow?
10. What is Your Home’s Value or Purchase Price?
11. Is This Your Primary Residence?
12. What Type of Loan?
13. What Term Length?
14. How Long Have You Been Employed?
15. Do You Have a Bankruptcy?
16. Has Your Property Been Listed For Sale?
17. Are You a US citizen?

If you receive rate quotes without providing this information you are getting a bogus quote. The person quoting you has no intention of honoring the rate they are giving you. You can save yourself a lot of money and future headaches by avoiding this person all together.

The good news is that you can find honest mortgage brokers willing to work for a reasonable origination fee without marking up your mortgage rate. You can learn more about choosing the best mortgage offer for your situation when refinancing, including expensive pitfalls to avoid with a free mortgage refinancing DVD.

If you are in the market for a new mortgage loan, doing your homework before applying can literally save you thousands of dollars and many headaches. The mortgage industry has earned a reputation for sleazy sales tactics rivaling the worst used car salesman; most mortgage brokers today only care about pulling in a six figure salary regardless of who they step on. Here are several tips to help you avoid being taken advantage of when taking out a new purchase mortgage or refinancing your existing loan.

Tip Number One: Beware Bank Originated Mortgage Loans

Many people think banks and credit unions are the best places to shop for interest rates. While this can be true for savings accounts and CDs, taking out a mortgage from your bank or credit union is a very bad idea. Banks and credit unions are exempt from the Real Estate Settlement Procedure Act (RESPA) that protects homeowners from abusive lending practices by requiring mortgage lenders to disclose their profit margins and mortgage rate markup. The Banking Lobby spent millions of dollars making sure Congress excluded mortgage bankers from this important disclosure legislation; as a result your bank does not have to play by the same rules as other mortgage lenders.

Banks Charge Service Release Premium

Banks make the majority of their profit by selling mortgage loans to investors on the secondary mortgage market. Banks make the majority of this profit by charging above market mortgage rates. Your bank knows the mortgage rate you would qualify in the wholesale market; however, banks set their own rates to include the markup known as Service Release Premium. Because banks are exempt from RESPA they will never tell you how much they’ve marked up your mortgage interest rate. In fact, bank employees will often show you their rate sheets and swear their rates are not marked up. Only by comparing the bank rate sheet to the par rates charged by wholesale lenders can you see the bank’s markup. Why would you ever consider taking out a mortgage from someone that doesn’t have to play by the rules?

Tip Number Two: Mortgage Brokers Charge Yield Spread Premium

We’ve already established that mortgage bankers are evil, but what about mortgage brokers? Like your bank, mortgage brokers make the majority of their profit by marking up your mortgage interest rate. This markup of your mortgage rate is called Yield Spread Premium and is responsible for the sleazy pressure sales tactics used by mortgage brokers today. Mortgage brokers charge Yield Spread Premium because the lender pays them a bonus of one percent of your loan amount for every quarter percent they mark up your rate. Most brokers do this without telling you.

Mortgage brokers have clever ways of disguising their markup on the HUD-1 settlement statement and often leave it off the Good Faith Estimate altogether. When questioned about Yield Spread Premium many brokers become defensive, even angry, telling you that because this fee is paid by the lender and that you shouldn’t worry about it. What you should worry about is why this fee is being paid by the lender. The fee is paid because you are accepting an above market interest rate that could raise your payment hundreds of dollars each month unnecessarily. Did you know the Secretary of Housing and Urban development was recently quoted saying that homeowners overpay nearly sixteen billion dollars annually because of this markup?

How to Avoid Paying Yield Spread Premium

By avoiding this unnecessary markup of your mortgage interest rate you can refinance with a wholesale mortgage rate. Start by asking your mortgage broker what the “par” rate is and ask to see the rate sheet from the wholesale lender. Make sure the rate sheet you see is from the wholesale lender and not typed up on your mortgage broker’s company letterhead. Tell your broker that you understand how Yield Spread Premium works and will not tolerate the markup or any kind of “lender paid compensation” on your loan. It’s usually best to negotiate with a self-employed mortgage broker that owns their business as brokers working for large firms often lack the authority to make a deal like this.

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Most homeowners have heard about rescission but do not understand how it works. The three day recession allows you time to review all of your documents after closing to make sure the loan you got is the mortgage you were promised. You have until midnight on the third day to cancel your loan for any reason. This serves to protect homeowners from the pressure sales and bait and switch tactics commonly used by mortgage lenders.

Your mortgage broker is supposed to inform you of your rescission rights; however, most brokers continently forget to disclose this to you when refinancing your mortgage. If you decide to take advantage of rescission you will need to fax the written cancellations to your mortgage broker, lender, and Title Company involved with your loan. The three days timeframe you have for rescission include any business day, Monday thru Friday, excluding weekends and Federal holidays.

Suppose for example you close your loan on Tuesday. Your three day rescission period will be Wednesday, Thursday, and end Friday evening at midnight. Remember that weekends do not count, if you close on a Friday for instance your recession period is Monday, Tuesday and Wednesday with the loan funding on Thursday. Holidays including Labor Day, Columbus Day, Veteran’s Day, President’s Day, Independence Day, Martin Luther King’s birthday, Thanksgiving, Christmas, and New Years do not count against your rescission period.

Knowing your rights as a homeowner is an important part of protecting yourself from abusive lending practices. Mortgage loans are a huge liability and should be treated with care. Don’t ever let a pushy mortgage broker put you in a loan you do not want or fully understand. You have the right do cancel any mortgage during the tree day recession period; just make sure you provide written notification to all parties concerned before the deadline expires. If you elect to cancel your loan I would recommend following up with a telephone call after you provide written notification to the broker, lender, and Title Company.

You can learn more about your rights and the protection provided to homeowners in the United States including strategies for refinancing with a free mortgage tutorial. Register today with no obligation using the links provided at the top of this page.

Refinancing your home mortgage loan can be an overwhelming experience for many people. New homeowners are bombarded with acronyms and jargon like APR, ARM, GFE…at times it can be too much to handle. Today I’m going to talk about the Annual Percentage Rate (APR) and the best way to comparison shop mortgage offers when refinancing.

There are many misconceptions and bad advice surrounding Annual Percentage Rate. Many people, including some financial advisors, will tell you that using the APR is the best way to compare mortgage offers when refinancing. While it’s true that Federal Truth in Lending Laws in the United States require mortgage lenders to publish a figure called “Annual Percentage Rate,” there are no standards that lenders are held to when calculating this figure.

So What is Annual Percentage Rate?

APR is a rate of interest expressed as an annual percentage that is supposed to tell you at a glance the costs of borrowing with a particular loan. The intent was to keep lenders honest when advertising their ultra-low teaser rates. Unfortunately, the Truth in Lending Law failed to protect homeowners from abusive lending practices.

The biggest problem with Annual Percentage Rate is that every lender calculates the figure differently and there are no standards lenders are required to follow when disclosing their fees. While it’s true this isn’t the lender’s fault, they certainly use this flaw in disclosure laws to their advantage. Because every lender calculates their APRs differently, relying on this figure to compare loan offers is like comparing apples to oranges and will not tell you which loan is the better deal.

How Do You Shop for a Mortgage if the APR is Useless?

There are several ways to compare loan offers before committing to a mortgage lender. One thing you need to understand about shopping for a mortgage is that you’re relying on honesty of a stranger. Shopping for a mortgage loan is a lot like shopping for a used car. Your salesperson wants you to pay as much as possible for the car because their commission depends on it. The same is true for mortgage brokers, and as you might know from stories in the news or personal experience, mortgage brokers do not have a reputation for being honest people.

There are two documents that you will encounter when refinancing your mortgage that will help you choose a lender. The first is the Good Faith Estimate (GFE). While Good Faith Estimates are flawed like the Annual Percentage Rate and are only as good as your broker is honest, they give you an itemized list of charges you can use to make a comparison. Mortgage lenders are required by law to provide you with a Good Faith Estimate upon receipt of your application; however, most will give it to you in advance if you ask politely.

The Good Faith Estimate leaves much to be desired and many originators omit or misrepresent charges to make their loan offers more attractive. You can keep this person honest using the HUD-1 statement before you sign your loan contract. You should receive the HUD statement at least 24 hours prior to closing. Your mortgage lender is required to disclose everything on this document and if the charges do not come close to what you received on the Good Faith Estimate you’ll need to have a heart-to-heart discussion with the person originating your loan before taking your business elsewhere.

You can learn more about comparison shopping for the perfect mortgage when with my free mortgage refinancing video tutorial. The videos and tools are yours free with no obligation now or in the future.

If you’re in the process of shopping for a new loan to refinance your existing mortgage, there are several things you need to know about the quotes you receive. Many homeowners don’t realize that mortgage loans are retail products and like anything else you purchase they’re marked up by the “middleman” for a profit. Here are several tips to help you recognize and avoid paying this markup when refinancing your mortgage.

When you request a mortgage quote online or in person the quote you receive should come from a wholesale mortgage lender that broker represents. The wholesale lender determines your interest rate based on your credit and the details of your application and provides this mortgage rate to your broker, who marks your rate up for a bonus. This markup is called Yield Spread Premium and is paid in addition to the origination fees you’re already paying for this person’s services.

The good news is that once you’ve learned how to recognize Yield Spread Premium on your Good Faith Estimate and HUD-1 settlement statement you can avoid paying it. There are several things you need to know in order to pull this off when refinancing. If you’re dealing with a mortgage broker make sure that person actually is a broker, not someone representing a bank. You can do this by asking if they close mortgage loans in their own name, or the name of their company. If the answer to either of these questions is “Yes” you are dealing with a bank and need to find a new broker.

Once you’re certain the mortgage company or broker you’re dealing with represents a wholesale mortgage lender and not a bank, you’ll need to get them to show you the Yield Spread Premium they’ve added to your loan. Most mortgage brokers will be extremely reluctant to disclose this markup of your mortgage rate because the commission they receive for overcharging you represents a significant portion of their income.

Your mortgage broker is legally obligated to disclose Yield Spread Premium on the Good Faith Estimate; however, because this document is just an “estimate” you will probably not get an accurate representation of the markup. The actual markup of your mortgage interest rate appears on the HUD-1 settlement statement. Yield Spread Premium is usually disclosed in the neighborhood of lines 810-812. Many mortgage brokers have clever ways of disguising this markup. You might see it called “broker rebate,” YSP, or YSP paid by lender. Don’t be fooled…this commission is being paid because your mortgage company or broker is overcharging you for the mortgage.

This so called POC charge or “Paid Outside of Closing” is the legal speak mortgage lenders use to justify the markup. Mortgage broker compensation paid by the lender outside of closing really comes out of your pocket in the form of a higher mortgage rate and payment amount. Your mortgage broker might even try and justify the expense by telling you that if the lender didn’t pay this fee it would end up in the “Cost to Borrower” column. What your mortgage broker isn’t acknowledging is that you’re already paying a perfectly reasonable origination fee for their services. Throw in Yield Spread Premium and you’ve got higher monthly mortgage payments for the next 15 to 30 years.

You can learn more about negotiating for a wholesale interest rate when refinancing your mortgage with my free mortgage toolkit. Register today by clicking the image of a DVD at the top of this page; the toolkit is yours free.