If you are in the process of refinancing your home mortgage loan there are a number of pitfalls that can result in overpaying thousands of dollars per year.
These pitfalls range from the markup of your mortgage rate to junk fees that raise your monthly payment. Avoid these refinance traps and you can save thousands of dollars every year that you keep your mortgage. Here’s what you need to know.
Avoid These Refinance Traps
What are mortgage refinance junk fees? Anything that serves no purpose other than boosting the mortgage broker’s commission at your expense is a junk fee. Mortgage brokers receive compensation for their work from a number of sources and if you’re not careful these fees can result in overpaying thousands of dollars every year that you keep the loan.
The first mortgage broker fee you’re likely to encounter when refinancing your home mortgage is the loan origination fee. This is a fee paid to the mortgage broker specifically for their part in arranging your loan. A reasonable amount to pay the mortgage broker for loan origination is one percent of your loan amount; however, many brokers will try and pad this fee. This origination fee, while frequently overcharged, is fairly straightforward and will appear on your Good Faith Estimate and HUD-1 statement.
Don’t Put Much Faith in Your Good Faith Estimate
The law requires mortgage brokers to provide you a copy of the Good Faith Estimate as part of their disclosures; however, there are no standards as to what fees have to be disclosed to you and many are conveniently left off to make expensive loan offers seem more attractive. Your Good Faith Estimate is little more than a marketing tool used to lure homeowners into overpriced home loans… don’t trust this mortgage document.
If you can’t rely on the Good Faith Estimate when shopping for a mortgage loan what can you trust? There are two reliable documents you will receive when refinancing your home loan. The first is the original written rate lock confirmation from the mortgage lender and the second is the HUD-1 Settlement Statement; however, neither one of these documents help you shop for a mortgage loan. Make sure that the rate lock confirmation you receive comes from the mortgage lender and not the mortgage broker and never accept verbal confirmation of your rate lock. As for the written confirmation, make sure it comes from the mortgage lender and is not typed up on your broker’s letterhead. Many mortgage brokers pass off bogus rate lock confirmation in an attempt to hide their markup of your mortgage interest rate.
How to Shop for a Mortgage Loan
A common refinance trap to avoid is shopping for a mortgage loan like you would a kitchen appliance. While it’s true that mortgage loans are retail products and are subject to the same type of markup that results in overpaying, you don’t want to try making apples to apples comparisons of your mortgage loan offers. There is simply no reliable way to screen mortgage loans when refinancing due to these limitations of your disclosure documents.
The best way to shop for a new mortgage when refinancing is not to compare loan offers, but shop for the right mortgage broker instead. When you find the right person to arrange your next mortgage you’ll avoid all of the refinance traps that I’ve mentioned here today. How can you find the right mortgage broker to arrange your home loan? It’s not as hard as you might think; however, there is one other junk fee we need to discuss known as Yield Spread Premium.
Unnecessary Mortgage Broker Fees
Ask most mortgage brokers about Yield Spread Premium and they get defensive, even angry. Many think that as a mortgage broker Yield Spread Premium is their birthright. The simple fact of the matter is that charging an origination fee and Yield Spread Premium is advantageous and wrong. What is Yield Spread Premium? Simply put, it is the number one refinance trap to avoid and according to the HUD Secretary will cost homeowners in the United States sixteen billion dollars this year.
Yield Spread Premium is a Trap
Not only is Yield Spread Premium a trap that drives up your mortgage payment unnecessarily, like the jelly of the month club it’s keeps doing it all year long…every year you keep the mortgage loan. Yield Spread Premium is a fee paid to your mortgage broker for locking and closing your home loan with a higher than necessary mortgage rate. Mortgage lenders reward your mortgage brokers for overcharging you with this commission. Because you’re closing with a higher mortgage rate than you deserve your monthly payment will also be higher than it needs to be, meaning you’re overpaying as long as you keep this mortgage loan.
Yield Spread Premium works as an incentive from the lender for overcharging you. For every .25% you overpay on your mortgage the broker receives a bonus of 1.0% of your loan amount in addition to the origination fee you’re already paying. The good news is that like any other refinance trap, Yield Spread Premium and other junk fees can be avoided.
You can learn more about this article Avoid These Refinance Traps, including which mortgage fees are junk like Yield Spread Premium by registering for my Underground Mortgage Videos. Register today and you’ll get immediate online access to all the videos without downloading anything to your personal computer.
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.
