Finding the right person to originate your mortgage can mean the difference between refinancing with a perfect loan and making an expensive mistake. Mortgage brokers work on commission just like a used car salesman; many rely on many of the same sales tactics. Here are several tips to help you find the right mortgage broker when refinancing your mortgage.
Why You Should Refinance With a Mortgage Broker
Despite their shortcomings and reputation as sleazy salespeople, mortgage brokers have access to wholesale mortgage rates. You’ll never get access to wholesale rates refinancing with your bank or most internet lenders; only a mortgage broker can get you the lowest wholesale interest rate. The problem with mortgage brokers is that most of them will try and line their pockets at your expense.
Before you decide to refinance your home mortgage with a broker it is important to understand how mortgage brokers are compensated. Mortgage broker compensation comes from two sources: you and the lender. Your broker will charge you “origination points” for their services. This fee should not be more than one percent of your loan amount or one point. In addition to the fees paid out of your pocket mortgage brokers are compensated with a commission from the lender.
This lender kickback to your mortgage broker serves only one purpose; it’s a reward for charging you an above market interest rate. Mortgage brokers do this because the lender pays them an additional point for every quarter percent you agree to overpay. Remember that one point is always one percent of the loan amount and this kickback from the lender is paid in addition to the origination fees you’re already paying.
Avoiding Mortgage Lender Kickbacks
This kickback from your lender for overcharging you is called Yield Spread Premium and is simply the difference between the wholesale interest rate you qualified and the above market rate your broker offers you. Your challenge when refinancing your mortgage is not finding the best offer as many homeowners think, but finding an upfront mortgage broker that will work for a reasonable origination fee without charging you Yield Spread Premium.
Many Homeowners Have Never Heard of Yield Spread Premium
The majority of mortgage brokers will not admit that they’re marking up your mortgage interest rate for profit. Ask your broker direct questions about Yield Spread Premium and many will try and explain it away as a fee the lender pays. They’ll even tell you not to worry about it because the money isn’t coming out of your pocket. What your mortgage broker isn’t telling you is that Yield Spread Premium is paid as a reward for overcharging you. When confronted with this fact many brokers become defensive and angry; and why wouldn’t they? Yield Spread Premium is effectively doubling, often tripling the compensation they receive on your loan.
How to Recognize Yield Spread Premium
Mortgage brokers have clever ways of disguising and explaining away their markup. Many brokers leave Yield Spread Premium off your Good Faith Estimate entirely; however, they are required to list it on the HUD-1 statement. If this markup is include in your loans you will find it on lines 810-811 of the settlement statement. Your HUD-1 can be used to keep your mortgage broker honest; however, when shopping around for the right broker you’ll need to negotiate for one that won’t charge you this unnecessary markup.
What is an Upfront Mortgage Broker?
Upfront mortgage brokers are as the name implies brokers that disclose their fees in writing before you commit to a loan. The upfront mortgage broker works for an origination fee and will not add Yield Spread Premium to your mortgage interest rate. Conventional mortgage brokers charge “retail” mortgage rates and getting them to admit they’re the reason the mortgage rate is retail is next to impossible.
When shopping for a mortgage broker look for one that is a member of the Upfront Mortgage Broker Association (UMBA). If there are no members working in your State you can still negotiate with potential mortgage brokers to avoid paying the markup. Tell any potential mortgage brokers that you understand how Yield Spread Premium works and will not tolerate this markup of your mortgage interest rate. Tell them you will pay a reasonable origination fee for their services but will not accept any loan that includes lender paid compensation.
According to the Secretary of Housing and Urban Development Yield Spread Premium is responsible for homeowners in the United States overpaying almost sixteen billion dollars each year. You might ask how Yield Spread Premium is even legal when it is rarely disclosed and clearly taking advantage of homeowners; however, despite the raging debates in congress this unnecessary markup and fleecing of the American homeowner remains perfectly legal.
You can learn more about refinancing your home mortgage loan with a wholesale mortgage rate without overpaying with my free video toolkit. Register today, the videos are free and there is no obligation to you whatsoever.
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.
