Refinancing your mortgage loan can be a stressful time for any homeowner. No one wants to pay too much when taking out a new home loan; however, most homeowners don’t fully understand how loan originators and lenders make their money. Learning how your mortgage broker is compensated for their work will not only help you avoid paying too much but show you how to refinance your home with a wholesale mortgage rate. Here are several tips to help you refinance your home with a wholesale mortgage rate.
First Things First: What is a Loan Originator?
Mortgage loans are retail products like any of the other purchase we make as consumers, and there’s always someone in the middle trying to make a buck. This “middleman” is your loan originator. This person could be a mortgage broker or a loan representative at the mortgage company arranging your loan.
Mortgage loans are funded by wholesale lenders that do not deal with the public directly. You might think that by contacting a wholesale lender you’ll get around the middleman and refinance with a wholesale interest rate; however, most wholesale lender have retail divisions and will not get a wholesale mortgage rate by tying to slip on past the middleman.
How Do You Get a Wholesale Rate?
In order to gain access to wholesale mortgage rates when refinancing you’ll need to enlist the help of a mortgage broker. There are problems you’ll need to overcome to get wholesale mortgage rates; mainly that your mortgage broker is paid by commission and a large portion of their bottom line comes from closing loans with retail mortgage rates.
What Are Retail Mortgage Rates?
Retail mortgage loans include the loan originator’s markup of your mortgage interest rate. In order to fully understand your mortgage loan you need to understand how loan originators, in this case your mortgage broker, are compensated for their work. Mortgage brokers receive their compensation from two sources. The first is by charging you an origination fee, also called origination points, for arranging your mortgage loan.
This origination fee is charged as a percentage of your mortgage amount. Remember that one “point” is one percent of your loan amount and you should never agree to pay more than one percent to the broker for loan origination. If your mortgage broker refuses to negotiate on the origination fee you should find another broker for your new mortgage loan.
The second way that your loan originator receives compensation is by marking up your mortgage interest rate which is what we are attempting to avoid. This markup of your mortgage interest rate by the loan originator is called Yield Spread Premium. According to the Secretary of Housing and Urban Development, unnecessary mortgage rate markup will cost American homeowners nearly sixteen billion dollars this year. Markup of your mortgage rate by the broker is completely unnecessary because you’re paying the broker a perfectly reasonable origination fee for their work. Not only is Yield Spread Premium unnecessary but most mortgage brokers forget to mention that they’re charging you the markup or try and explain it away. If your mortgage broker tells you not to worry about Yield Spread Premium because the fee is being paid by the lender they’re lying to you.
Your lender is paying a fee for Yield Spread Premium because you’ve agreed to pay a higher than necessary mortgage interest rate. Yield Spread Premium is only used to reward your mortgage broker for overcharging you. There are a few cases where Yield Spread Premium can be used by an honest mortgage broker to pay your closing costs; however, any other justification by your broker is a lie.
How to Negotiate With Your Mortgage Broker
In order to refinance your mortgage with a wholesale interest rate you’ll need to find a mortgage broker willing to work for a one percent origination fee without charging you Yield Spread Premium. You can start by searching the Internet for an Upfront Mortgage Broker licensed in your State. Upfront Mortgage Brokers belong to a national association of mortgage brokers that have pledged to originate mortgage loans in an honest and ethical manner. The association may not have a member licensed in your State; however, you can still negotiate with a traditional mortgage broker to refinance with a wholesale mortgage rate.
Start your negotiations by telling potential mortgage brokers that you understand how Yield Spread Premium works and will not accept any loan that includes this markup. It is usually best to attempt negotiations with the owner of the brokerage firm or an independent broker as a company representative may not have the authority to make the decisions you need made.
Many mortgage brokers become defensive and even angry when discussing Yield Spread Premium; after all, this markup represents a significant portion of that person’s income. If you encounter resistance when negotiating over Yield Spread Premium simply scratch that mortgage broker off your list and move on.
How to Keep Your Mortgage Broker Honest
Once you’ve found a mortgage broker willing to work for a one percent origination fee, how can you tell if your broker is being honest with you? There are two documents you will receive when refinancing your mortgage that you can use to keep your broker honest. The first is your Good Faith Estimate; however, many mortgage brokers omit or understate fees on the Good Faith Estimate to make their loan offers seem more attractive.
The second document you’ll need is the HUD-1 statement and you should receive this document at least 24 hours prior to closing. If Yield Spread Premium is included with your loan it will be disclosed on lines 810-811 of this document. If these lines are blank you’re good to go with the loan.
Never Yield to High Pressure Sales Tactics
Don’t let a mortgage broker bully you into a loan that you don’t want. The law requires a three day cooling off period before your loan is funded for you to change your mind. You have three business days to review your loan contract and make sure the mortgage you received is the loan you were promised and on the fourth business day your lender will fund the loan. During these three business days you can change your mind for any reason by notifying your lender in writing and over the telephone.
You can learn more about your rights as a homeowner and mortgage refinancing with a wholesale mortgage by registering for my free Underground Mortgage Videos.