If you’re in the process of refinancing your home you’ll want the lowest possible mortgage rate for your next loan. The lower your mortgage rate, the lower your payment will be, meaning you’ll keep more hard-earned cash in your pocket. The problem is how do you get low mortgage rates and what is a low rate anyhow? Most people’s idea of mortgage shopping is to collect quotes from every broker in the phone book or eLender website on the Internet before picking the “lowest” quote. The problem with this approach to mortgage shopping is that all of the quotes you find online or get out of the phone book have been marked up to create a commission for someone.
Here are my best tips for getting the lowest mortgage rate when refinancing your home. By the way…I know of one mortgage “guru” that charges $49 for the information in this article…
What is a Good Mortgage Rate?
Mortgage loans that are not originated by banks can be considered retail products like most things you purchase today that have been marked up for profit. The problem with the retail nature of mortgage interest rates is that you’re already paying an origination fee to the person arranging your loan, any markup of your mortgage interest rate for an “extra” commission drives up your mortgage payment unnecessarily.
So what is a good mortgage rate? The industry word for the best possible mortgage rate on any given day is known as a “par mortgage rate.” What are par mortgage rates? Simply put, a par mortgage rate is one that you don’t have to pay discount points to get and does not create the extra commission known as Yield Spread Premium for the person arranging your loan. Remember that discount points are a fee charged at closing in exchange for lowering your mortgage rate. One discount point is one percent of your loan amount and is the cash amount you’ll have to come up with to get or lower a specific rate. If you’re paying discount points one point typically lowers your mortgage rate by .25% and in today’s market is generally not worth your money. Most people will want to avoid paying discount points when refinancing a home mortgage loan.
What is Mortgage Yield Spread Premium?
Not too many homeowners know about Yield Spread Premium, often abbreviated YSP, which is the main reason most people overpay for their home loans. In fact, the Secretary of Housing and Urban Development was recently quoted stating that homeowners in the United States will overpay nearly sixteen billion dollars this year alone because of it. What is Yield Spread Premium? The best way I can explain this lender paid fee is that it is a cash percentage of your loan amount created for the person arranging your mortgage when they lock and close your home loan with a higher than necessary mortgage rate.
This higher than necessary mortgage rate results in a higher than necessary mortgage payment that you’ll keep paying every month. How much higher you ask? Here’s a simple example to illustrate just how much Yield Spread Premium is probably costing you right now on your existing home loan. Suppose for example you plan on refinancing your home for $300,000. Your mortgage broker quotes you a mortgage rate of 6.75% and charges you a loan origination fee of 1.5%. Plug these figures into a simple mortgage calculator and you’ll find that the monthly payment on a 30 year fixed rate mortgage of 300,000 at 6.75% is $1,945. What your mortgage broker isn’t telling you about this transaction is that you actually qualified for a 6.25% mortgage rate but they’ve marked it up to 6.75% to get two points Yield Spread Premium from the lender. If you had the mortgage rate that you deserve at 6.25% your monthly payment would only be $1,847. That’s a difference of $1,176 you’re throwing away because the mortgage broker lied to you and who can’t use an extra $1,176 in today’s economy?
How to Get a Par Mortgage Rate
I get a lot of angry comments from mortgage brokers. I’m not a broker myself, I’m just a guy who got ripped off and now I do this more or less as a hobby. I’m not saying mortgage brokers shouldn’t get paid for their work. That is what the loan origination fee is for. What I am saying is that your mortgage broker has no business charging you a point or two for loan origination and then marking up your mortgage rate for Yield Spread Premium from the lender. This double dipping (more like triple dipping in most cases) is outrageous and plain dishonest.
Again, not all mortgage brokers are bad…you just have to find one who isn’t. I can tell you the mortgage broker driving a company hummer with their face and logo splattered all over it probably isn’t going to be the right person for the job. This is also true of the mortgage broker with a full page in your phone book. These people work out of posh offices often employing expensive sales staff and will simply be unwilling to negotiate a loan that doesn’t include Yield Spread Premium. Remember when refinancing your home you want a par mortgage rate so don’t be afraid to tell potential mortgage brokers that you understand how Yield Spread Premium works, that you’ll pay a reasonable fee for loan origination, (one point is reasonable, not a penny more) and you want a par mortgage rate. Shop around enough for the right person and you’ll find an honest mortgage broker willing to accept your terms.
Keeping Your Mortgage Broker Honest
Once you’ve found a mortgage broker willing to work for a one percent origination fee without taking Yield Spread Premium, how do you keep them honest? Much of the documentation you receive from the lender before closing is worthless. Mortgage lenders routinely lowball fees on the Good Faith Estimate to lure homeowners into overpriced loans and because the Annual Percentage Rate is based on your Good Faith Estimate it is equally worthless for comparing loan offers.
Your first opportunity for securing reliable documentation from the lender is when you lock in your mortgage rate. The written rate lock confirmation from the lender will clearly disclose your interest rate and any Yield Spread Premium on the loan. Make sure you get written confirmation from the lender. If it’s not in writing you haven’t locked. Also, make sure that your written lock confirmation came from the lender and isn’t something your mortgage broker typed up on their company letterhead. Many brokers pass off bogus rate lock confirmation to hide the Yield Spread Premium they’ve taken on your home loan. The next document you’ll use to ensure you’re not paying too much at closing is the HUD-1 settlement statement. Makes sure you get this prior to closing and carefully review it for junk fees. Yield Spread Premium will be in section 800 and anything on this document resembling a rate lock fee or a mortgage broker courier fee is a junk fee you’ll want to avoid paying.
You can learn more about getting the best mortgage rates while avoiding junk fees and Yield Spread Premium by registering for my free Underground Mortgage Refinancing Videos.
Here’s a quick sample of what you get when you sign up today:
P.S. Earlier I made a distinction that mortgage loans not originated by banks could be considered “retail.” You might think “I’ll just avoid all of this mortgage broker nonsense by refinancing with my bank.” The problem with bank originated mortgage loans is that your bank does the same thing mortgage brokers do AND because of a loophole in the Real Estate Settlement Procedures Act are not required to tell you they’ve done it. When a bank marks up your mortgage rate their profit on your loan is called Service Release Premium and does the same thing to your payment as Yield Spread Premium. Banks do not give their customers par mortgage rates and some of the worst predatory lenders around are banks like Wells Fargo and Countrywide, now Bank of America.
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.
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