If you are considering using a mortgage broker to refinance your home mortgage loan, there are several things you need to know before choosing a broker. Mortgage brokers are very similar to used car salesmen as the more you pay the higher their commission will be. Mortgage lenders actually pay an incentive to brokers for overcharging you. This incentive is called Yield Spread Premium and avoiding this markup needs to be your number one priority when refinancing. Here are the basics you need to know when choosing the right mortgage broker to refinance your home.
Yield Spread Premium: What You Need to Know
Mortgage brokers are compensated for the work by charging you an “origination fee” for the loan and by a premium paid by the wholesale lender. This premium is paid when the broker marks up the interest rate that your lender approved you. The “Yield Spread Premium” is the difference between the wholesale rate you were approved and the interest rate your broker tells you that you qualified. This markup is what makes mortgage rates retail; fortunately, homeowners who understand how this works can avoid paying it and qualify for wholesale mortgage rates.
Many mortgage brokers tell you not to worry about the premium because the fee is being paid by the lender. The problem with this reasoning is not the fact that the lender is paying the fee, but why they’re paying it in the first place. This fee is a reward to the broker because you’ve agreed to refinance with an above market mortgage rate. Your broker receives a commission of one percent of your loan amount for every .25% you agree to overpay. Most brokers omit their markup from your Good Faith Estimate so you’ll have to pay close attention to your HUD-1 statement. Look for this unnecessary markup to be disclosed around line 810 of the HUD-1.
How to Find a Broker Without Paying Yield Spread Premium
This commission based markup of your mortgage interest rate can be avoided. If you’re up-front with potential mortgage brokers and let them know that you understand how Yield Spread Premium works you can refinance your mortgage with a wholesale mortgage rate. When comparison shopping for a broker you might have the best luck working with one that is self-employed. Large brokerage house may not give their mortgage brokers the authority to make you a deal that doesn’t include Yield Spread Premium. Whenever possible try and deal with the owner of the business and let them know up front that you will not accept any mortgage that includes lender paid compensation for a higher interest rate.
You can learn more about your mortgage refinancing options, including expensive pitfalls to avoid by registering for a free video toolkit.
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.
