Before refinancing your mortgage it is always a good idea to shop around for the best mortgage rate; however, unless you go about it correctly you will simply be choosing the best of the worst loan offers available to you. Here are several tips to help you comparison shop and close with the mortgage rate you deserve.
The reason most homeowners do not close with the mortgage rate they qualified is because their loan representative marks up the interest rate to receive a commission from the wholesale mortgage lender. In most cases you’ll never be told this happening and if the markup is disclosed it’s buried deep in your paperwork.
This markup of your mortgage interest rate is called Yield Spread Premium and according to the Secretary of Housing and Urban development will cost homeowners nearly $16 billion dollars this year. Why do mortgage companies and brokers mark up your interest rate? They do this because the markup will double, even triple their profits from your loan.
Here’s an example of Yield Spread Premium in action. Suppose you refinance a $250,000 mortgage at 6.5%. The mortgage broker charges you a point, or one percent of your loan amount, for the origination fees. One percent is a perfectly reasonable origination fee; however, what the mortgage broker isn’t telling you is that you qualified for a 6.0% mortgage rate from the wholesale lender.
Your mortgage broker marked up your mortgage rate because the wholesale lender pays them 1.0% of your loan amount for every .25% they mark up the interest rate. In this example you’ve already paid the broker $2,500 in origination fees; however, with the $5,000 they receive from the lender their total commission for this mortgage is $7,500. Can you see how the mortgage broker is lining their pockets at your expense? Fortunately for you, homeowners who learn to recognize this markup can avoid paying it when refinancing. You can learn more about refinancing your home loan without overpaying with our free mortgage 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.
