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How Mortgage Rates Work

Are you considering taking out a new mortgage to refinance you existing loan and want the lowest possible mortgage rate? Did you know that wholesale mortgage are available to the average homeowner who knows how to get them and can save thousands of dollars? Here are several tips to show you how rates are quoted so that you can take advantage of wholesale mortgage rates.

Banks vs. Mortgage Brokers

There are basically two types of rate quotes out there today. There are mortgage rates quoted by banks that fund loans with their own money and rates quoted by mortgage brokers reselling loans from wholesale lenders. Both types of mortgage rates are considered “retail” mortgage rates because they include markup. Banks mark up their mortgage rates to make a profit when selling their loans to investors and mortgage brokers mark up their rate quotes to get a bonus from the lender for closing loans with above market mortgage rates.

Take out a mortgage from either one of these and you’ll pay too much just to give someone a profit. If retail mortgage rates are inflated to give someone a commission, how do you refinance your home loan without paying too much? The first thing you need to do when shopping for a mortgage is avoid your bank completely. Your bank will never negotiate with you over mortgage rates or fees because they don’t need to; banks aren’t even required by law to disclose their markup or profit margins on your loan thanks to a loophole in the Real Estate Settlement Procedures Act. With this in mind why would you give your business to someone that doesn’t have to play by the rules?

How Mortgage Rates WorkUnderstanding Yield Spread Premium

Now that you’ve ruled out banks for your next mortgage you need to understand how wholesale mortgage rates work. These rates are offered by wholesale lenders that do not deal with the public directly; you might think you can avoid the broker by contacting a wholesale lender yourself…the only problem is that every wholesale lender has a retail division that deals with the public. Only mortgage brokers have access to wholesale mortgage rates.

Now that you know that mortgage brokers are the only way to get wholesale mortgage rates, how can you find one that won’t rip you off? While it’s true that mortgage brokers have earned a reputation for being sleazy sales types there are honest people working in the industry…you just have to find them and learn how brokers make their money.

How Mortgage Brokers Are Paid

Brokers receive compensation from two sources in a typical mortgage transaction. When taking out a mortgage you are usually required to pay an origination fee for the broker’s services. Many brokers charge a “loan processing fee” on top of their origination fee; however, this processing fee is a garbage fee you should not agree to pay. What is a reasonable fee for loan origination? One point, or one percent of your loan amount is reasonable and fair compensation for your mortgage brokers services.

The second way that mortgage brokers receive compensation is from a commission paid by the lender. Commissions are usually paid for selling something…so you might be surprised what exactly your broker sells to earn this commission…it’s a higher mortgage rate. That’s right…your mortgage broker receives a commission from the lender for closing loans with above market mortgage rates. This commission is called Yield Spread Premium and according to the Secretary of Housing and Urban Development is responsible for homeowners in the United Sates overpaying billions of dollars for their home loans every year.

You Can Avoid Yield Spread Premium

Understanding that the rate quotes you receive include commission based markup is the first step to avoiding it. Your mortgage broker receives one percent of your loan amount for every quarter percent that you agree to overpay…tell your potential mortgage brokers that you understand how Yield Spread Premium works and you’ll be in a much better place to negotiate for a wholesale mortgage rate.

You can get started by contacting local mortgage brokers in your telephone book and tell them that you will pay a reasonable fee for loan origination but will not accept a mortgage that includes lender paid compensation or Yield Spread Premium. When negotiating with mortgage brokers you may be more likely to be successful negotiating with mortgage brokers that are self employed; representatives at a large brokerage firm may not have the authority or willingness to negotiate over Yield Spread Premium.

You can learn more about mortgage rates and refinancing your home with the lowest possible rate by checking out my free Underground Mortgage Videos. Register today while these videos are still a free offer and you’ll learn how to avoid the retail markup and garbage fees that you hear about in the news.

{ 2 comments… add one }
  • Bryan December 31, 2008, 4:11 am

    Hi, I am a mortgage broker and I totally agree with this article. Our company is in PA and we are also licensed in VA and MD. We have 10 loan officers who all close a handfull of loans per month. We are one of those shops that charge 1% origination fee while ALSO giving the customer the Par Rate! We gain a lot of referal business this way. Is there anything we can do to participate with your website in order to offer the consumer this great deal?

  • sal August 14, 2009, 1:05 pm

    This article explains mortgages rates very well and the advantages of working with a certified mortgage broker vs the bank. Why pay them more to borrow money? Deal with a mortgage broker!

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