The mortgage quotes you receive when shopping for a new lender do not give you the actual interest rate you qualify when refinancing. The rate quotes you get are “retail” mortgage quotes that include unnecessary commission based markup. Here are several tips to help you understand how mortgage rates are quoted so you can refinance with the actual mortgage rate you qualify.
Mortgage Yield Spread Premium
The commission based markup of your mortgage rate is called Yield Spread Premium and you can avoid paying it by understanding mortgage quotes and learning how to read lender rate sheets. In order to understand how commission based markup works it is helpful to understand how mortgage brokers and other loan originators are compensated.
Mortgage Broker Compensation
Mortgage brokers are compensated for their work from two sources. You will be required to pay the broker a fee for their part in arranging your loan. This fee is commonly called an origination fee or origination points and should not be more than one percent of the amount you are refinancing. The second method is the so called “lender paid compensation,” or Yield Spread Premium. This fee is paid by the lender as an incentive for overcharging you. For every .25 percent your broker inflates your mortgage rate they receive one percent of your loan amount in lender paid compensation.
Why do lenders reward mortgage brokers for overcharging you? The majority of profit for a lender comes from selling mortgage loans to investors on the secondary market. Mortgage loans with above market interest rates bring premium profits for the lenders and this is why your broker is rewarded for overcharging you.
How Mortgage Rates Are Quoted
Every wholesale lender publishes their rate sheets by fax or online each day. Mortgage brokers use these rate sheets to quote you a rate; however, the quote you get is not based on your credit or financial details as you might expect. Your mortgage quote is based on how much the broker thinks you’re willing to pay in addition to the mortgage rate you qualified. Just like a used car salesman your mortgage broker quotes you an interest rate with their commission check in mind.
How to Avoid Yield Spread Premium
Most homeowners unknowingly agree to retail mortgage rates without knowing their broker marked up the interest rate. This amounts to paying thousands of dollars unnecessarily over the lifetime of the loan. Yield Spread Premium is a completely unnecessary fee because you are already paying a perfectly reasonable origination fee for your mortgage broker’s services. Homeowners who learn to recognize this markup can find honest mortgage brokers and negotiate to avoid paying it. This is much easier than it sounds and you can save yourself thousands of dollars refinancing with a wholesale mortgage rate.
How to Recognize Yield Spread Premium
Many mortgage brokers become defensive when asked about Yield Spread Premium. If your broker gets angry or tells you not to worry about the fee because it’s being paid by the lender you are probably dealing with a dishonest person. Tell your prospective mortgage brokers that you understand how Yield Spread Premium works and will pay a reasonable fee for their services but will not accept loan offers with this “lender paid” compensation.
Ask your mortgage broker to show you the rate sheet from the wholesale lender on the day you lock in your rate. Make sure the rate sheet comes from the lender and is not something typed up on the mortgage broker’s letterhead. If the broker refuses to show you the rate sheet or makes excuses this person is not being honest with you; find another mortgage broker that will be.