Mortgage brokers are salespeople just like any other kind; they are paid by commission and it’s in their best interest to sell you something that gives them the largest commission. When it comes to your mortgage, the loan that offers the highest commission is probably not the best loan for your situation. Finding the best mortgage for your financial takes more than just comparison shopping; you’ll need to negotiate with potential mortgage brokers to ensure the fees and mortgage rates you’re quoted are fair.
Understanding how mortgage brokers are compensated will help you avoid paying too much when refinancing your home loan. For starters, mortgage brokers make money in two ways. Brokers are compensated by the origination fees you pay at closing and by marking up your mortgage interest rate. The origination fees you pay should never be more than 1% – 1.5 % of your loan amount; this origination fee pay is easy enough to haggle over when choosing a broker. The problem comes when the broker marks up your mortgage interest rate.
What is Yield Spread Premium? This retail markup of your mortgage interest rate is the difference between the rate you were approved by the wholesale lender and the mortgage rate you close. The mortgage broker marks up your rate because the lender pays them a bonus of 1% of your loan amount for every .25% they markup your interest rate. This frequently happens without your knowledge or consent.
The good news is that you can avoid paying this unnecessary and frequently hidden markup of your mortgage interest rate by negotiating with potential mortgage brokers. Tell your mortgage brokers that you will pay a reasonable origination fee of one percent (start low and negotiate higher if necessary) and all necessary third party closing costs. Tell your potential mortgage brokers that you understand how Yield Spread Premium works and will not accept the markup. Any honest mortgage broker will agree to these terms. Ask to see the lock agreement from the wholesale lender and compare it to the rate lock you received from your broker.
You can learn more about working with a mortgage broker without losing your shirt by registering for our free mortgage tutorial.