Here’s an example of how not to refinance your mortgage; a typical refinancing transaction gone wrong. Our homeowner in this is example is called Jackie. Jackie purchased her home in Germantown Maryland, and owes $330,000 on an existing thirty year mortgage at 9% interest. Jackie decides she’d like to refinance her fixed rate mortgage and take cash back to pay off the bills she racked up during her family’s summer vacation.
How does Jackie go about refinancing her mortgage? She calls a mortgage broker recommended by one of her girlfriends. We’ll call the mortgage broker Terry. Jackie’s friend has never used this broker, she only knew him as a casual acquaintance. Jackie calls up Terry who immediately goes into his sales mode pitching Jackie with a hybrid Adjustable Rate Mortgage. On the surface it’s an attractive offer: Terry tells Jackie that she qualifies for a 7.75 percent interest rate that’s fixed for 5 years. He’s only charging her 1.5 points for the origination fee and she’ll get $25,000 back at closing.
Jackie thinks she got a fantastic deal and thanks her friend for referring her to Terry. Think Jackie got a good deal refinancing her mortgage? Well, since the title of this article is how not to refinance your mortgage, you’re probably thinking Jackie got taken to the cleaners, and you’re right. Here’s where Jackie went wrong with her new mortgage loan.
The first thing wrong with this transaction is that Jackie jumped at the first favorable offer she received. Jackie never questioned the figures Terry presented her and never noticed the prepayment penalty he slipped in the contract. Jackie never knew the 1.5 points she paid for the origination fee was highway robbery; considering Terry helped himself to an additional $10,650 commission at her expense. Because of the prepayment penalty Jackie is stuck with an above market interest rate on a bad mortgage and doesn’t even know it. How can you avoid Jackie’s mistakes? Read on…
The first thing you need to know in order to avoid a loan like Jackie’s is how mortgage brokers are compensated for their work. Your mortgage broker is paid in two ways. First, the broker receives the origination fee you pay for arranging the loan. In this example the broker charged Jackie 1.5 points, or 1.5% of the loan amount, for the origination fee. Remember that a point is the equivalent of one percent of your loan amount due at closing. A reasonable amount to pay for loan origination is 1 point, or one percent. This is the first area Jackie overpaid for her new mortgage.
The second way mortgage brokers are compensated for arranging your loan is the so called “Lender Paid” compensation. This is a fee paid by the lender as commission for the loan. Most homeowners think since the lender’s paying the fee and it’s not coming out of my pocket, why should I care how much the broker gets from the mortgage lender, right? Wrong! Consider why the lender pays your broker this fee…it is in fact an incentive for overcharging you on your mortgage interest rate.
That’s right, your mortgage broker knows the wholesale interest rate that your lender approved you but keeps this information from you. The broker marks up your mortgage rate much like a car dealer selling used cars to people that don’t understand blue book values. The less you know, the more you’ll pay. The wholesale lender rewards your mortgage broker with a bonus of one percent of your loan amount for every quarter percent you agree to overpay. In Jackie’s example the lender approved her for a mortgage rate of 7.0%; her broker marked it up for the additional commission from the lender. This unnecessary markup of your mortgage interest rate has a name; it’s called Yield Spread Premium. According to the Secretary of Housing and Urban Development, Yield Spread Premium costs homeowners in the United States nearly six billion dollars every year. That’s right, six billion dollars.
Jackie’s mortgage broker collected 3.0% of her loan amount, plus the 1.5% he overcharged her for the origination fee. For a couple hours work the broker walked away with $15,975 at Jackie’s expense. Ever wondered how your mortgage broker makes his Hummer payment? Now you know.
Let’s recap: Jackie’s first mistake was neglecting to shop around and compare fees from a variety of brokers and lenders. If she had done this she would have seen that 1.5% for the origination was too high. Her second mistake was neglecting to do her homework. If Jackie had invested the time she could have learned about Yield Spread Premium and refinanced with a wholesale mortgage rate. Finally, Jackie’s stuck with a hefty prepayment penalty. The next time she decides to refinance her mortgage she’ll be facing a large fee to get out of her existing loan. If Jackie had carefully read the paperwork and questioned her broker about this prepayment penalty and the markup of her interest rate she wouldn’t have the lousy mortgage she’s now stuck with.
Fortunately for you, doing your homework is easier than you think. By learning to recognize the unnecessary markup of your mortgage interest rate you can negotiate for wholesale mortgage rates when comparison shopping for a new mortgage. When you’ve done your homework you can avoid the unnecessary junk fees Jackie paid when closing on her new mortgage loan; application fees, lock fees, broker courier fees…these are all garbage fees that you’ll be able to avoid when refinancing.
How can you learn all of these money saving secrets Jackie doesn’t know when refinancing your mortgage loan? Register for my free mortgage toolkit and you’ll learn just that. The free videos will not only teach you how to refinance your mortgage with a wholesale mortgage rate but will show you how to avoid paying garbage fees every step of the way. Register today…it’s free and you’ll find links for signing up at the top and bottom of this page.