If you’re in the market to refinance your home mortgage loan and search for 30 year mortgage rate information on the internet, you’re bound to find a lot of confusing and conflicting information. How do you sort through the obvious crap and find honest rate information that does not include needles sales markup like the bogus mortgage rates you find on bankrate.com? Here are several tips to help you separate the wheat from the chaff when it comes to hunting for the lowest 30 year mortgage rates when refinancing your home loan.
How Are Mortgage Rates Determined?
The first thing you should know about mortgage rates is that they come in two flavors. There are the retail mortgage rates quoted to 98% of homeowners that don’t know any better and the wholesale rates offered to brokers by big mortgage companies like Countrywide. You might think you can bypass the broker and their markup by going to a wholesale lender directly; however, every lender out there has a wholesale division and a retail division. Contact lenders directly and you’ll always be dealing with their retail division and the same unnecessary markup of your mortgage rate that you’re trying to avoid.
How to Make Sense of 30 Year Mortgage Rates
Before diving into 30 year mortgage rate quotes there is some terminology you need to be familiar with. The first term I’ll cover is the discount point. Most people know about discount points…a fee you’ll pay to buy down your mortgage rate. What you might not know is that genuine discount points go directly to the wholesale lender…unlike the origination points people frequently overpay to the person arranging their loans. If you ever come across a “discount point” that is paid to the broker and not the lender this is a bogus charge that you should never agree to pay. Your broker quoted you a much higher rate then you qualified and pocketed your discount points.
Banks do the same thing…you might think your bank or credit union is getting you a good deal. What you probably don’t know is that banks are exempt from the Real Estate Settlement Procedures Act and never have to disclose how much of your rate is marked up to boost their profit margins.
The next term I need to cover is the so called “par mortgage rate.” What is a par mortgage rate? This is simply the 30 year rate that doesn’t require you to pay any discount points to get it and does not create any money for the broker. By not creating any money for the broker this means it has not been marked up for Yield Spread Premium. You can’t always get par rates when refinancing your home loan but you can come pretty close if you know where to look.
Mortgage brokers are the only way to get genuine par rates because they alone have access to the rates offered by wholesale lenders. The trick is to find a mortgage broker willing to give you access to wholesale rates without marking them up for a commission. Remember that bank mortgage rates always have markup built into them and will typically be half a point (or more) higher than rates offered by wholesale lenders. This is why you should never take out a mortgage loan from your bank or credit union.
The last term I’ll cover today is Yield Spread Premium. This is the commission created for the broker when you lock and close at a higher than par mortgage rate. You may be required to pay discount points to the lender to lower your rate; however, when it comes to creating cash for your brokers “bonus” it’s paid because you’re agreeing to a higher 30 year mortgage rate than you need to. Avoiding Yield Spread Premium needs to be your priority when refinancing your home loan.
Here are several examples how 30 year mortgage rates are quoted on rate sheets from a mortgage broker and a bank so that you understand how the broker and the lender profit from your loan
6.25% ( Includes .25% Broker Markup) 1% Bonus to Your Broker
6.125% (Includes .125% Broker Markup) .5% Bonus to Your Broker
6.0% Par Mortgage Rate – Zero Bonus Paid or Discount Points Required
5.875% (Includes .5% Discount) Paid Directly to the Lender
5.75% (Includes 1.% Discount) Paid Directly to the Lender
When your mortgage rate is quoted higher than par a cash bonus is created for the broker. Rate sheets usually show this cash with parenthesis; however, your rate sheet might show this with a minus sign. When your 30 year mortgage rate is quoted below par, discount points are required to secure this rate for your loan.
6.75% (.25% Markup) Goes to Your Bank (Service Release Premium)
6.625% (.125% Markup) Goes to Your Bank (Service Release Premium)
6.5% Par Mortgage Rate With Zero Markup
6.375% (.125% Discount) Discount Point Paid to the Bank
6.25% (.25% Discount) Discount Point Paid to the Bank
One thing to note here is that Yield Spread Premium only applies to mortgage brokers. When the markup is done by your bank this is pure profit and goes by the name Service Release Premium. As you can see in the previous example the so called “par rate” for the bank is .5% higher than the one offered by a broker. This is why you’ll never get a wholesale rate from your bank or credit union.
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.
