Banks and mortgage brokers often tout no-fee mortgage refinancing as the sure path to mortgage bliss. What they don’t tell you or downplay in their sales pitch is what you’re giving up for that no-fee home loan. Here’s one RefiAdvisor case study demonstrating how much you can save following the system outlined in my free Underground Mortgage Refinancing Videos on your next mortgage refi.
Common Mortgage Mistakes Will Cost You
Most homeowners take a one and done approach to mortgage refinancing. They’ll contact one lender, often choosing their existing lender and bang out the paperwork as quickly as possible. The fact is, even the Federal Trade Commission has acknowledged the majority of homeowners neglect doing their homework when it comes to their home loans and common mortgage mistakes are very costly.
This case study will focus on one of the most common mortgage mistakes regarding the loan origination fee. Before I start it’s important that I introduce you to a little known fee paid by mortgage lenders called Yield Spread Premium. Don’t worry if you’ve never heard of lender paid compensation, most homeowners haven’t. Simply put, lenders pay this fee to any loan originator that locks and closes your mortgage refi with a higher than necessary interest rate. The more the broker marks up your interest rate, the higher the fee paid by the lender.
2011 saw some changes to the laws regarding mortgage broker compensation and many people now dismiss yield spread premium as irrelevant; however, the only thing that really changed is that your broker is now required to disclose what the fee is for and cannot charge you for loan origination on top of lender paid compensation.
The Problem With No Fee Mortgage Refinancing
Your mortgage loan origination fee is the type of mortgage points paid to the person arranging your refi. This fee is intended to compensate them for the work they do arranging your home loan; brokers are people too and deserve to get paid for their work right? A reasonable amount to pay for the loan origination fee is one percent of your home loan amount. This fee is of course negotiable so don’t be afraid to haggle with prospective brokers over your business.
Many brokers (banks too) like to push no-fee mortgage refinancing as the best way to save a bundle from closing costs. Why not just let the lender pay your origination fee and closing costs for you without adding anything to the principal balance of your home loan? Sure you’ll be giving up the best refinance rates and accepting a higher payment amount but most brokers will tell you the higher amount is negligible and don’t worry about it.
No-Fee Mortgage Refi Case Study
Let’s see if there’s any truth to this negligible increase in your payment amount. Suppose you’re refinancing your home for $250,000 and you qualify for an interest rate of 5%. Your broker sells you on a no-fee option meaning you don’t have to pay the origination fee or closing costs. Sounds like a great deal right?
In order to get this deal you’ll have to agree to a 5.5% mortgage rate so that the lender will pay Yield Spread Premium to the broker. In this case study the broker receives 2% of your home loan for the higher interest rate, which is $5,000.
What is the negligible amount you’ll be paying extra to avoid the origination fee and closing costs? Well, a 30-year, fixed rate home loan for $250,000 at 5.5% will cost you $1,420 per month. If you paid the broker fee yourself (remember, one percent is reasonable, in this example $2,500) you would be able to refinance at 5.0% and your monthly payment would be only $1,345. That’s a difference of $75 per month. No biggie right?
This isn’t a car loan we’re talking about here; this is a 30-year mortgage loan! Overpaying $75 per month is $900 a year…in just five short years you’ll have paid $4,500 for just over $3,000 in closing cost. Ten years later that amount balloons to $9,000. Do you really have $9,000 lying around that you don’t care about?
This case study illustrates just one of the ways my Underground Mortgage Refinancing Videos can save you money refinancing your home loan.
Here’s a quick sample to get you started on the right path to mortgage bliss for your next home loan.
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.
