If you are in the process of taking out a new mortgage loan to refinance you existing mortgage or purchase a new home, there are several things you’ll want to know about mortgage rate quotes to avoid paying too much. You may have arrived here searching for the lowest rates mortgage lenders; however, getting the lowest mortgage rates can be tricky due to hidden markup and junk fees. Here are several of my best mortgage tips to help you find the lowest rates mortgage lenders for your next home loan without paying junk fees.
Lowest Rates Mortgage Lenders
The first thing you need to know about mortgage lenders is that not all lenders are the same. Choosing one type of lender over another can result in paying higher mortgage rates. There are three types of mortgage lenders that I’ll discuss today, as well as the pros and cons of each. The first type is your bank or credit union. The main advantage of taking out a mortgage with your bank is convenience…what could be easier than transferring funds from your checking account every month to pay your mortgage bill? Bank mortgage rates aren’t the greatest, especially when you compare them to wholesale mortgage rates. This is because the bank makes the majority of their profit from your home loan by selling your mortgage to investors on the secondary market. Home loans with higher than market mortgage rates make them a premium profit known as Service Release Premium. Another problem with bank originated mortgage loans is that thanks to a little known loophole in the Real Estate Settlement Procedures Act (RESPA) your bank is not required to disclose their markup or profit margin on your home loan.
The second type of lender we’re going to discuss today is known as a broker bank. In the 90s the Banking Lobby in the United States successfully lobbied Congress to have the RESPA laws changed to exclude banks. This means banks have an unfair advantage over mortgage brokers that are required to disclose any markup of your mortgage rate for a profit. When the law changed a number of mortgage companies and brokers changed their business models to operate like a bank. This means they formed companies that fund home loans with their own cash rather than reselling loans from wholesale lenders. This change in their business model allows these mortgage broker banks to exploit the same loopholes enjoyed by banks. If you take out a mortgage loan from your bank or a broker bank you’ll never get the lowest mortgage rates when refinancing or purchasing your home. How do you recognize a broker bank? Simply ask what name they close your mortgage under. If they close in the name of their company rather than a wholesale lender you know you’re dealing with a mortgage broker bank.
Wholesale Mortgage Loans
Most people, including many mortgage brokers, will tell you that you can’t get wholesale mortgage rates. While many mortgage brokers markup mortgage rates offered by wholesale lenders for a commission known as Yield Spread Premium, it is possible to find a mortgage broker willing to work for a flat origination fee of one percent without marking up your mortgage rate. By paying the origination fee up front, (one percent is perfectly reasonable for the mortgage broker fee) you avoid unnecessary inflation of your mortgage payment. So how do you find a wholesale mortgage loan? You might think by contacting a wholesale mortgage lender directly you’ll be able to cut out the middleman and refinance or purchase with a wholesale mortgage rate. Unfortunately, this isn’t the case. Wholesale mortgage lenders have retail lending divisions so if you want a wholesale mortgage rate you have to find the right mortgage broker to arrange your home loan.
How to Find the Right Mortgage Broker
Getting a wholesale mortgage rate isn’t as hard as it sounds. You don’t have to be a financial guru to pull it off; you’ll just need to find the right mortgage broker for the job. The problem is that many shady mortgage brokers rely on Yield Spread Premium to boost their bottom line at your expense. You’re already paying a perfectly reasonable origination fee for this person’s work arranging your home loan so any commission paid by the mortgage lender for marking up your mortgage rate only drives up your monthly payment unnecessarily.
How do you find the right mortgage broker when refinancing or purchasing your home? Start by telling prospective mortgage brokers that you understand how Yield Spread Premium works and that you will not accept any home loan that includes this markup. Offer to pay a reasonable origination fee for the mortgage broker’s services. One percent is a perfectly reasonable origination fee and there are many honest mortgage brokers willing to arrange your home loan without taking Yield Spread Premium.
2010 RESPA Changes
In a lackluster attempt to protect homeowners from mortgage broker abuse of Yield Spread Premium, the Department of Housing and Urban Development (HUD) enacted several changes effective January 1st, 2010. Mortgage brokers now have to include Yield Spread Premium as part of the origination fee in your loan documents. This doesn’t really help homeowners because mortgage brokers will go on telling you that since the lender is paying that portion of the origination fee and it’s not coming out of your pocket that you shouldn’t worry about it. No big change there. HUD has also revamped the Good Faith Estimate and you will now receive three pages of low-balled fees instead of the two page GFE you’re used to. These changes are pretty much cosmetic and do very little to protect homeowners from abusive mortgage practices. Of course, banks and broker banks are still exempt from RESPA legislation and can charge their borrowers pretty much whatever they like.
You can learn more about getting a wholesale mortgage rate for your next home loan by checking out my Underground Mortgage Refinancing Videos.
Here’s a sample of what you’ll get when you sign up…this video shows you more about how Yield Spread Premium drives up your mortgage payment unnecessarily and what you can do to avoid it.