One of the best kept secrets of the mortgage industry is that your mortgage rate is marked up to give the loan originator a commission. This markup is what makes your mortgage interest rate “retail.” Most homeowners have no idea this has happened or what they can do to avoid the unnecessary markup. Here are several tips to help you recognize and avoid retail markup when refinancing your mortgage.
The mortgage marketplace consists of wholesale lenders, banks, and broker-banks. When we eliminate banks and broker-banks from our list of potential lenders due to the holes in the Real Estate Settlement Procedures Act, your ideal mortgage will come from a wholesale lender.
How does the average homeowner get a wholesale mortgage loan? Can members of the public even deal with wholesale lenders? Many homeowners think that by contacting a wholesale lender directly they’ll get a wholesale mortgage interest rate; however, when you contact a wholesale lender you are always dealing with that lender’s retail division.
Because the average homeowner does not have access to wholesale mortgage rates, we’ll have to pay a third party to get them for us. A good mortgage broker can do just this; however, the problem is that mortgage brokers are paid by commission. The loan that gives your broker the best commission is not the mortgage you want to have.
How can you refinance your home using a mortgage broker without paying too much? Homeowners who understand how mortgage brokers are compensated can negotiate with their broker to pay a reasonable origination fee without any of the originator’s markup. The difference between the mortgage rate the wholesale lender approves you and the interest rate you close with is the retail markup you want to avoid. This markup is called Yield Spread Premium and according to the Secretary of Housing and Urban Development results in American homeowners overpaying nearly sixteen billion dollars each year.
The problem with refinancing with a mortgage broker is that most brokers will not admit what they are doing with Yield Spread Premium. Questioning your mortgage broker about this markup is a lot like haggling with a used car salesman over price. Many will try and explain away this markup by telling you their compensation is paid by the lender and doesn’t come out of your pocket. This is a lie because in exchange for “lender paid” compensation you’re accepting an above market mortgage rate and higher payments for the entire duration of your loan.
If you’re upfront with potential mortgage brokers when comparison shopping you can find an honest broker that will work for a reasonable origination fee. A reasonable origination fee is one percent of your loan amount and not a penny more. Tell your potential brokers that you understand how Yield Spread Premium works and will not tolerate lender paid compensation with your loan.
How can you recognize Yield Spread Premium on your loan documents when refinancing? You can start by checking the Good Faith Estimate. The markup may or may not be listed here; however, if it’s present you’ll find it around line 810. If you can’t find Yield Spread Premium on the Good Faith Estimate your lender is required to disclose it on the HUD statement. Yield Spread Premium will always be found in the neighborhood of lines 810-811 of these documents.
You can learn more about your mortgage refinancing options, including costly pitfalls to avoid by checking out my free mortgage video toolkit. The toolkit is yours free with no obligation now or in the future. You can get it today by registering for my free Underground Mortgage Videos.
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.
