What’s a good reason for refinancing your mortgage loan? Is it always to get the lowest payment or are there other reasons for taking out a new home loan? Many people will tell you that you should “Never” refinance your mortgage unless the new mortgage rate is at least two percent lower than what you’re paying now. This is probably the worst mortgage advice in the history of bad advice.
Refinancing your mortgage could be a good idea for you if there is some financial benefit over the long term. Contrary to popular belief a lower mortgage payment may not have long term benefits, especially if you end up paying more to your lender for your financing. There are a number of perfectly good reasons for refinancing without qualifying for a lower mortgage rate. Many homeowners refinance with a higher monthly payment using a 15 year mortgage to build equity in their homes at a faster rate. Other reasons for a higher payment include borrowing against your equity to make home improvements or consolidate your high interest debts. If your current mortgage is with one of the predatory banks or mortgage lenders you’ve been hearing about in the news there’s no better reason than for refinancing than finding a reputable mortgage company.
So what should you look for when refinancing? Many homeowners obsess over mortgage rates and overlook the unnecessary fees in their Good Faith Estimate. Other homeowners don’t understand the retail nature of their mortgage interest rates and overpay hundreds of dollars every month because their mortgage interest rate has been marked up to give the broker a bonus. The mortgage industry is every bit as bad as a shady used car salesman; homeowners who take the time to do their homework before refinancing can save themselves thousands of dollars and many headaches.
Where to get started doing your homework when refinancing? The first thing you need to familiarize yourself with is Yield Spread Premium. It’s okay if you’ve never heard of this before; it’s not as scary as it sounds. Yield Spread Premium is simply the markup your broker adds to your mortgage rate to get a bonus from your lender. The problem with this markup is that you’re already paying an origination fee for the broker’s work; Yield Spread Premium really just double-dipping in your pocket…a sleazy way to make a buck.
Yield Spread Premium (YSP)
How does this mortgage scam work? Your mortgage broker qualifies you for a specific interest rate when the wholesale lender approves your loan. Most brokers will not tell you the interest rate you qualified or show you a wholesale rate sheet from the lender. Instead they mark up this interest rate based on how much they think you’ll overpay. (Sounds like a used car salesman right?) For every quarter percent you overpay for your new mortgage rate the broker gets a commission from the lender of one percent of your mortgage.
Considering that you’re already paying one percent or more for loan origination, YSP can actually double, even triple your broker’s compensation for originating your loan. Sounds like a good deal for the broker; they’ll even tell you not to worry about this fee on your HUD-1 statement because it’s being paid by the lender. The question you need to be asking is why the lender would pay this fee in the first place. Wholesale lenders make a bundle selling loans with above market interest rates to investors. Yield Spread Premium is an incentive for overcharging you, plain and simple.
Don’t be fooled by a fast-talking mortgage broker…do you really want to be making his boat payment for the next thirty years? You can learn more about refinancing your home loan without being ripped off by registering for this free mortgage refinancing tutorial.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
