Mortgage interest rates are a source of confusion for many homeowners. You’ll see rate quotes published on the Internet and advertised on television, but how do you know if those rates apply to you? There are a number of factors that influence the mortgage rate you will qualify including your credit; however, many homeowners are unaware that there is a “dark side” of mortgage rates that could cost you hundreds of dollars every month. Here are the basics you need to understand about mortgage rates and how you can avoid unnecessary markup when purchasing your home or refinancing an existing mortgage.
Factors That Influence Your Mortgage Rate
When you qualify for a mortgage loan there are a number of factors that determine the interest rate you are approved. Some of these factors including the economy, supply-and-demand, and wholesale mortgage rates are outside of your control. Other factors include your credit score, property type, whether or not you live in the home, how much equity you have, and how much of a commission your loan originator is trying to build into your mortgage loan.
Know Your Credit History
Your credit score is an extremely important part of your mortgage rate. Credit scores are based on the contents of your credit history and 35% of your score is based on your history of making on time payments. Before you begin shopping for mortgage rates it is extremely important to request a copy of your credit report from each credit agency and carefully review your records for errors. If you find mistakes in your credit reports you will need to dispute the mistake with each credit agency and allow enough time for the correction to be reflected in your credit score.
Paying for your credit reports is not necessary as Congress recently passed a law requiring Equifax, Experian, and Trans Union to provide you a free copy of your credit history once per year. If you want a credit score you will have to pay for your credit score; however, it is not necessary to pay for a credit score as you can receive this from your lender if you want to know your score. Concentrate your efforts on checking your credit history for errors and paying all of your bills on time rather than worrying about what your exact credit score is.
If you have negative information in your credit history such as a write-off or judgment, you can improve your credit score by settling with that creditor. You may be able to pay as little as 30 or 40 cents on the dollar to have this negative information removed; try negotiating with the company responsible for the negative information to pay and have this removed before shopping for mortgage rates.
Mortgage Rate Markup
The dark side of mortgage rates is an unfamiliar subject for most homeowners; so much that the Secretary of Housing and Urban Development recently stated that this markup will cost American homeowners nearly sixteen billion dollars this year alone. This markup of your mortgage rate is called Yield Spread Premium and avoiding it needs to be your number one priority when shopping for mortgage rates.
What is Yield Spread Premium?
The markup you pay on the wholesale or “par” rate that you qualify is called Yield Spread Premium. Your mortgage broker marks up your mortgage rate because the wholesale lender pays them a bonus for overcharging you. For every quarter percent you agree to overpay on the mortgage your broker receives a commission of one percent of the loan amount. This is paid in addition to the origination fees you’re already paying for the broker’s services; Yield Spread Premium allows many brokers to double, even triple their commission on your loan.
Why is Yield Spread Premium Bad?
Mortgage brokers are greedy people…sorry to say it, but it’s true. Many mortgage brokers become defensive, even angry when questioned about Yield Spread Premium. Your broker might tell you: “Don’t worry about the fee; if the lender’s paying it, it’s not coming out of your pocket.” The problem with this argument is not the fact that the commission is being paid, but the reason your lender is paying this fee. Yield Spread Premium is paid because you are accepting a mortgage loan with an above market interest rate. This means you will pay more unnecessarily for your financing every month that you keep this loan.
You Can Get Lower Mortgage Rates
Avoiding Yield Spread Premium allows you to take advantage of wholesale mortgage rates. You’ll need to find a mortgage broker willing to work for an origination fee without charging Yield Spread Premium and this is not a small task. You can start by telling prospective mortgage brokers that you understand Yield Spread Premium and will not accept any mortgage that includes the markup. It is usually best to negotiate with a mortgage broker that is self-employed as mortgage brokers working for a large firm may not have the authority to broker the type of mortgage you’re looking for.
Bank Mortgage Rates Are Not The Answer
You might think that by taking out a mortgage form your bank you’ll avoid all the mortgage rate problems with Yield Spread Premium. While it’s true that banks and other mortgage companies that fund loans with their own money don’t charge Yield Spread Premium, you’ll still get a marked up mortgage rate. Banks charge their customers Service Release Premium in order to profit when your mortgage is sold to investors on the secondary market. Your bank is also exempt from the Real Estate Settlement Procedures Act and is not required to tell you how much they’ve marked up mortgage rates or what their profit margin is on your loan. Why would you want a mortgage from a lender that is not required to play by the rules?
If you’d like more advice about finding the lowest mortgage rates while avoiding expensive pitfalls register for a free mortgage refinancing blueprint. You’ll get a six-part refinancing video series free with no obligation.
Nice article on Mortgage Rates. Really covers a lot of basics and more.