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.