If you’re in the market for a new home loan is a no origination fee mortgage a good deal or will not paying the originator cost you for years to come? There is a little know fee called Yield Spread Premium that could turn your sweet no origination fee mortgage into a sour deal, easily costing you thousands of dollars unnecessarily. Here are some facts to consider before opting for that no origination fee mortgage that will save you hundreds of dollars every single month that you’re paying on your home.
No Origination Fee Mortgage
The first thing you should know about any home loan is that the person arranging your home loan is going to get paid no matter what. It doesn’t matter if you go through your bank, a broker, or one of those faceless Internet giants like Lending Tree, the loan originator always gets paid. After all, that’s why they’re in business right? Like any other retailer, home loan originators make money at your expense. As a savvy homeowner, your goal is to pay these people as little as possible, keeping more of your cash in your pocket where it belongs.
The problem with these so called no origination fee mortgage loans is that you’re only giving up paying the origination fee in exchange for paying a lot more every month. The reason you’re paying more is due to lender paid compensation known as Yield Spread Premium. This is a selling point for many brokers simply because your neighbors just don’t know any better. It’s a truly effective sales pitch; unfortunately, it’s based on a half-truth, which for most people is a lie.
Your Mortgage Broker’s Half Truth
The pitch is that since the lender is paying for your no origination fee mortgage you don’t have to worry about the fee your lender is paying because it’s not coming out of your pocket. What could be better than the lender footing your bill for you? The problem is, and you’re familiar with the saying that there are no free lunches, is why would any lender agree to pay for your no origination fee mortgage loan? What’s in it for the lender? What your lender gets for footing the otherwise small origination fee for you (as little as one percent of your home loan amount) is a higher mortgage interest rate. This higher mortgage rate drives your monthly payments up by a hundred dollars or more for the entire duration of your home loan. That’s right, you can pay a small origination fee (tiny by comparison) now, or pay thousands of dollars every year for the rest of your home loan.
Mortgage Yield Spread Premium
How does this hidden markup of your interest rate in exchange for your no origination fee mortgage work? Your loan originator receives the fee known as Yield Spread Premium in exchange for locking and closing your no origination fee mortgage loan with a higher than necessary interest rate. For every .25 percent that you unknowingly agree to overpay the person arranging your home loan receives a kickback from the lender of one percent of your loan amount. Think of Yield Spread Premium as a lender paid incentive for your overcharging you.
So what does this hidden markup of your interest rate do to your monthly payments? Suppose for example you are refinancing your home for $275,000 and the broker sells you on a no origination fee mortgage at 6.75%. You save $2,750 by not having to pay the origination fee and your monthly payment on a thirty year, fixed-rate home loan will be $1,783. What you don’t know about this particular home loan is that you could have had a mortgage rate of 6.0%.
If you had this interest rate without the hidden markup for Yield Spread Premium, your monthly payment would only be $1648! That’s a difference of $1,620 EVERY year you’re paying just to save $2,750 at closing. Still think no origination fee mortgage loans are a good deal?
You can learn more about saving a boatload of cash with wholesale mortgage rates by checking out my free Underground Mortgage Refinancing Videos.
Here’s a quick sample to get you started exposing more of the truth about no origination fee mortgage loans.