Refinancing your home loan with a mortgage broker can help you find loan offers you wouldn’t find comparison shopping on your own. One big problem with mortgage brokers is that they are paid by commission and the loan that nets them biggest commission is probably the wrong loan for your situation.
Another problem with mortgage brokers are the sneaky and deceptive tricks they use to get their commission. Because you’re already paying a perfectly reasonable origination fee for their services, any additional commission is not only unnecessary, but is simply taking advantage of people. Here are several tips to help you avoid mortgage broker tricks when refinancing your mortgage.
The biggest trick your mortgage broker is likely to pull is what’s known as Yield Spread Premium. This is the unnecessary markup of your mortgage interest rate to get a commission from the lender. Never mind that you’re already paying origination fees; for every .25% the broker inflates your mortgage rate the wholesale lender pays them an additional 1% of your loan amount. Mortgage brokers are required by the Real Estate Settlement Procedures Act to disclose this markup; however, they have clever ways of disguising it on the HUD-1.
Here’s an example of a brokered transaction including Yield Spread Premium. Suppose you are refinancing your mortgage for $315,000. Your mortgage broker tells you they’ve got a great deal for you at 7.0% for 30 years. The broker charges you one percent for the origination fee which is a reasonable $3,150 to pay. What your mortgage broker isn’t telling you is that the wholesale mortgage lender approved you for a 6.5% interest rate and they’ve marked it up because the lender pays them a bonus of $6,300 for overcharging you.
Mortgage lenders pay a bonus for loans with above market interest rates because the lender makes the majority of their profit selling loans to investors on the secondary mortgage market. Loans with above market mortgage rates bring a premium profit for the lender. In the previous example your mortgage broker banked $9,450 and you get stuck paying an above market interest rate.
How Can You Avoid Mortgage Broker Tricks?
You can avoid paying Yield Spread Premium when refinancing by learning how to recognize the markup and negotiating with potential mortgage brokers. Start by telling your broker that you understand how this markup works and will not accept a loan that includes any lender paid compensation. You can learn more mortgage broker tricks to avoid when refinancing with our free mortgage toolkit.