Mortgage loans can be very confusing and there is an abundance of bad advice available on the Internet. Much of the mortgage information you find online is sales motivated and if you’re not careful you could wind up paying thousands of dollars unnecessarily. This is why doing your homework and carefully researching mortgage offers is important before applying for a new loan.
Doing your homework means more than simply comparing loan offers and choosing the loan with the lowest mortgage rate. You’ll need to negotiate with the mortgage companies you request quotes from to avoid paying Yield Spread Premium. This markup will cost you thousands of dollars in unnecessary mortgage interest each year if you accept a loan that includes this markup.
What is Yield Spread Premium? This is the markup your loan representative adds to your interest rate to boost their commission, often without telling you. Here is an example of how Yield Spread Premium works: suppose you are refinancing with a $300,000 loan using a mortgage broker. Your broker tells you that you qualify for a 6.5% mortgage rate and charges you 1.0% for the loan origination fees. What your mortgage broker isn’t telling you is that the lender approved you for 6.0% mortgage rate and they marked it up to receive a 2.0% bonus from that lender. The difference between the 6.0% mortgage rate you qualified and the 6.5% rate that you closed is Yield Spread Premium.
Once you understand how Yield Spread Premium works you can negotiate to avoid paying it. Tell your potential mortgage brokers that you will not accept this markup with your loan. Tell them you will pay a reasonable origination fee and all necessary closing costs; however, will not pay any amount of Yield Spread Premium. You can learn more about refinancing your mortgage without paying too much with our free mortgage video tutorial.