If you’re in the process of refinancing your home mortgage loan, understanding how mortgage rate quotes work will help you recognize a good deal when you find one. In order to comparison shop effectively it is important that you know how loan originators work and how they are compensated. Here are several tips to help you understand rate quotes and find the best deal when refinancing your home mortgage loan.
Your Loan Originator is a Middleman
The first thing you need to understand is that your loan originator does not set your mortgage rate or underwrite your loan. This person is simply a salesperson trying to earn a commission by referring your business to a wholesale lender. Your loan originator could be a mortgage broker or a representative at a brick and mortar company or mortgage website. There are two ways this salesperson is compensated for placing you with a mortgage loan. Understanding these fees will help you avoid being taken advantage of by this person.
Loan Origination Fees vs. Yield Spread Premium
Most mortgage brokers charge an origination fee for their part in arranging your mortgage loan. This fee can range from less than one percent to several percent; however, a reasonable fee to pay for loan origination should not be more than one percent of your loan amount. This is the only fee you can expect your mortgage broker to be upfront with you about; many brokers try and squeeze additional compensation out of your mortgage by marking up your interest rate. This broker added markup is called Yield Spread Premium.
Beware Broker Yield Spread Premium
The second method of mortgage broker compensation you need to be aware of is known as Yield Spread Premium. The “spread” is simply the difference between the mortgage rate you were approved and the rate quoted to you by your mortgage broker. Your broker marks up the interest rate because the wholesale lender behind your mortgage pays them a bonus of one percent for every .25 percent you agree to overpay. This “kickback” for overcharging you is paid on top of the origination fee you’re already paying for the broker’s services. Agreeing to pay Yield Spread Premium when refinancing your mortgage will double, often triple the compensation your broker receives for arranging your mortgage.
Many brokers tell you not to worry about Yield Spread Premium because the fee isn’t coming out of your pocket. This is a sure sign of a dishonest mortgage broker. Yield Spread Premium is paid because you’ve agreed to overpay for you loan. Anyone that tells you differently is lying.
Understanding Mortgage Rate Quotes
Your mortgage broker will always try and place you with the mortgage that makes them the largest commission. Once your mortgage broker sizes you up much like a used car salesman, they prepare a quoted based on how much they think you’ll agree to pay.
Selects the Mortgage Program (term length, interest rate, etc.)
Identifies the Property Type
Calculates the Estimated Loan to Value Ratio (LTV)
Calculates the Loan Amount Based on LTV
Determines the Rate Lock Duration and Terms
Calculates the Mortgage Rate Based on the Lender’s Rate Sheet
Calculates Their Desired Broker Commission Based on Yield Spread Premium
You an be certain the rate quote you receive includes Yield Spread Premium and that your Good Faith Estimate will have an origination fee in excess of one percent. Your job is to find an honest mortgage broker (they do exist) that will work for a reasonable origination fee without charging you Yield Spread Premium.
How to Negotiate with a Mortgage Broker
Shopping for a mortgage broker is a lot like shopping for a used car. Start by being direct and upfront about your expectations for the mortgage. Tell your potential mortgage brokers that you understand how Yield Spread Premium works and will not accept any loan offer that includes the markup. Tell them that you will pay a reasonable amount for the origination fee and try to negotiate this fee to one percent or less if possible of your mortgage amount.
Beware Pressure Sales Tactics and Intimidation
Never let a mortgage broker pressure you into taking a mortgage that isn’t right for your situation. If you feel pressure or are uncomfortable with your mortgage broker simply thank them for their time and move on to the next. Mortgage brokers are a dime a dozen in most states and finding the right person to originate your mortgage could be just a phone call away.
You can learn more about refinancing with a wholesale mortgage rate without paying too much with free mortgage videos. The video tutorial is divided into six sections and walks you step-by-step through the process of requesting rate quotes, comparison shopping, and refinancing with a wholesale mortgage rate. Request your videos today; they’re free with no obligation.
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.
