If you are in the process of refinancing your mortgage, comparison shopping can help you find a good lender; however, if you want the lowest possible mortgage rate you need to be prepared to negotiate. Most homeowners aren’t familiar with the difference between a wholesale and retail mortgage rate so here is a brief discussion about the difference. This applies only to mortgage loans funded by a wholesale lender and not your bank.
The mortgage loans that you and I receive are funded by wholesale lenders. These loans are “originated” by a mortgage company or broker in exchange for the origination fees we pay at closing. Paying your mortgage company or broker an origination fee of 1.0% of your loan amount is more than ample compensation for their services; however, they have ways of lining their pockets at your expense.
When a wholesale lender approves your mortgage application, you are approved for a specific “wholesale” mortgage rate. Your mortgage broker knows what this rate is but will mark it up because the lender pays them a bonus for overcharging you. The difference between the wholesale rate you qualify and the mortgage rate your broker offers you is called “Yield Spread Premium”
According to the Secretary of Housing and Urban Development, Yield Spread Premium will cost American homeowners sixteen billion dollars this year alone. If your goal for refinancing is to get the lowest possible mortgage rate you’ll need to negotiate to avoid paying Yield Spread Premium when comparison shopping.
When comparison shopping for a new mortgage, try and deal with the owner of the brokerage. Tell the broker that you understand how Yield Spread Premium works and will not accept any offer that includes it. Tell them you will pay a reasonable origination fee and all necessary closing costs; however, will not tolerate any form of lender paid compensation. You can learn more about refinancing your mortgage with a wholesale mortgage rate by signing up for our free video tutorial.