Refinancing your home loan with a mortgage broker can save you a lot of money if you can find the right broker. Mortgage brokers are often just like used car salesman; their commission is based on how much you overpay when refinancing. Here are several tips to help you negotiate with potential mortgage brokers to avoid overpaying when refinancing your home loan.
The obvious question you might be asking is “What is a reasonable mortgage broker fee?” To answer this question you need to understand how mortgage brokers are compensated for their services. When refinancing your mortgage the broker will charge you an origination fee (also called origination points) which should not be more than one percent of your loan amount. This origination fee is more than suitable compensation for the broker’s services; however, your broker has a knack for lining their pockets at your expense.
The second way mortgage brokers are compensated is by the lender. This “lender paid compensation” is actually an incentive for charging you above market interest rates. When the wholesale lender behind your loan approves your application, you qualify for a specific mortgage rate. The mortgage broker marks up your interest rate because the lender pays them one percent of your loan amount for every quarter percent they overcharge you. This markup is called Yield Spread Premium and homeowners who unknowingly agree to pay it could spend thousands of dollars unnecessarily.
How can you avoid paying Yield Spread Premium when refinancing your home loan with a mortgage broker? Start by negotiating with potential brokers and telling them upfront that you understand Yield Spread Premium and will not tolerate this “lender paid compensation” with your loan. Tell them you will pay a reasonable origination fee for their services, not more than one percent, and any necessary third party settlement charges. Any honest mortgage broker would agree to these terms and once you’ve found one you’ll be on the right track to finding the perfect loan.
You can learn more about refinancing your home loan while avoiding costly pitfalls with our free mortgage refinancing videos.