If you’re in the process of refinancing your home you’ll want the best deal for your next mortgage loan. Should you trust a mortgage broker with something as important as your home loan? It’s true that mortgage brokers have earned themselves a reputation for being sleazy used car salesmen; however, the short answer to the question of should you trust yours is “No”; however, that doesn’t mean you shouldn’t use one. Here are several tips to help you get the best deal for your next home loan without getting ripped off by your broker.
How Do Mortgage Brokers Get Paid?
If you want to avoid getting ripped off by a mortgage broker you’ll need to understand how they get paid. There are two ways mortgage brokers get paid for their work. First, they can charge you an origination fee, also called origination points for arranging your loan. This fee often varies from one mortgage broker to the next; however, a reasonable fee to pay for mortgage loan origination is one point, or one percent of your loan amount. Anything above one percent is simply paying too much…
The second way mortgage brokers get paid for their work is a fee from the lender. You might think that it’s better for the lender to pay the fee since it’s not coming out of your pocket; however, you have to ask yourself why the lender would pay this fee in the first place? What’s in it for them? That’s exactly the question you need to be asking anytime someone offers to pay a fee for you…in this case the lender is paying the broker a fee for marking up your mortgage rate. You get a higher than necessary mortgage rate that drives up your monthly payment and your mortgage broker gets a commission from the lender. Not a good deal if you ask me.
Mortgage Yield Spread Premium
The fee generated by this unnecessary markup of your mortgage interest rate is known as Yield Spread Premium. Here’s a simple example to illustrate how it works. Suppose you are refinancing your home for $315,000 and your mortgage broker quotes you an interest rate of 6.75 percent. The broker charges you an origination fee of one percent which is a reasonable fee to pay for the mortgage broker’s services; however, what your broker isn’t telling you is that you qualified for a 6.25 percent mortgage rate and they marked it up to get two points from the lender. This sleight of hand with your mortgage rate triples their commission in this example.
In this example the lender pays your mortgage broker one point for every .25 percent they overcharge you, but what does this mean for your mortgage payment? Plug the numbers into a simple mortgage calculator and you’ll see that your payment on a 30 year fixed rate mortgage for $315,000 at 6.75 percent will be $2,043 per month. If you had gotten the mortgage rate you deserve at 6.25 percent your monthly payment would be $1,939. That’s a difference of $1,248 you’re throwing away every year because your mortgage broker ripped you off!
You Can Avoid Yield Spread Premium
Don’t get me wrong, not all mortgage brokers are scum…they tuck their kids in at night just like everyone else. The question of finding the best mortgage loan when refinancing isn’t about shopping for the best lender or even the lowest mortgage rate, it’s all about finding the right person to arrange your next home loan. So who’s the right person? I can tell you the right mortgage broker for the job isn’t going to be the one with a full page ad in the phone book. Forget the mortgage broker with a company hummer splattered with their face and or logo. (I guarantee that mortgage broker is ripping people off)
If you want the best deals look for a small time, self-employed mortgage broker. Find one working from home? Even better…why then is a small time mortgage broker better? These brokers don’t work out of posh offices or hire an expensive sales staff to push their overpriced home loans. They don’t have the overhead and will be much more willing or able to negotiate the kind of deal you’re looking for when refinancing your home loan.
What Is a Good Deal For Your Next Mortgage?
I’ve been talking about getting the best deal when refinancing your mortgage, but how would you know a good deal if you found one? Sure getting a great rate is important, but you don’t want to pay too much at closing for that rate. Fortunately for you there’s an easy way to ask for a good deal and follow up to make sure you get it. What you want when refinancing your home is what’s called a par mortgage rate. Par means you don’t pay discount points to qualify and there is no Yield Spread Premium created by your loan. Par is essentially a wholesale mortgage rate. How do you get a par mortgage rate? Just ask for it…tell your mortgage broker you’re willing to pay a reasonable loan origination fee for arranging your loan but will not accept any mortgage that includes Yield Spread Premium. Ask for a par mortgage rate.
You can learn more about keeping your mortgage broker honest, avoiding junk fees and unnecessary markup by registering for my free Underground Mortgage Refinancing Videos.
Here’s a quick sample of what you’ll get when you register today.
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.
