Are you looking for a mortgage with the lowest possible monthly payment? Do you know which fees drive up your mortgage payment unnecessarily and how to avoid them? There is one hidden fee you should know about that according to the Secretary of Housing and Urban Development will cost homeowners in the United States sixteen billion dollars this year alone. Here are several tips to help you get the lowest possible monthly payment while avoiding unnecessary fees on your next home loan.
What Determines Your Monthly Mortgage Payment?
Assuming that you don’t have a derogatory credit rating there are two main factors that determine your payment amount. The first of course is the mortgage rate you qualify for, and the second is the term length you choose for your home loan. Term length is the amount of time you have to repay the loan and determines your amortization schedule. Amortization is a term that describes the repayment of your mortgage loan over time as well as how much of your monthly payment is applied to finance charges. The most common term length lengths are 15 and 30 years; however, there are 40 year terms available. As a rule of thumb the longer your term length the lower your monthly payment will be. Conversely, choosing a shorter term length will raise your payment amount as more of that payment will go towards repaying the loan, than paying the lender interest.
Fees That Affect Your Mortgage Payment
There is a fee you will find on your Good Faith Estimate known as a “Discount Point.” This is a fee your lender may require you to pay to qualify for a specific mortgage rate. One point is equal to one percent of your mortgage rate due at closing. Mortgage rates are very low in today’s market so it’s best to avoid paying discount points whenever you can as the return on your investment for paying this fee will be very low. As a rule of thumb one discount point should lower your mortgage rate by .25 percent; however, if your credit rating is poor you may be required to pay points just to get approved for the loan.
Hidden Fees That Raise Your Mortgage Payment
There is a hidden fee you will not find on your Good Faith Estimate that drives up your mortgage rate and monthly payment unnecessarily. Most people think that using the Good Faith Estimate is a way to compare mortgage fees when shopping for a home loan; however, while disclosure laws in the United States require lenders to provide you with a Good Faith Estimate, there are no requirements as to which fees need be listed. Most mortgage brokers find it convenient to leave off any fees related to their commission that drive up your mortgage payment.
The fee you won’t find on your Good Faith Estimate is known as “Paid Outside of Closing” or POC fees. This is a commission paid by the lender to the mortgage broker for locking and closing your home loan with a higher than necessary mortgage rate. This fee is also known as Yield Spread Premium, and while you won’t see it on your Good Faith Estimate it will appear in one form or another on your HUD-1 statement. The problem is by the time you get the HUD-1 it’s often too late to do any good for comparison shopping. So how can you recognize Yield Spread Premium earlier in the mortgage process?
How to Recognize Paid Outside of Closing (POC) Fees
The first opportunity you’ll have to spot the POC fees also known as Yield Spread Premium on your loan, assuming that your broker is honest about not taking this fee on your loan, is when you lock in your mortgage rate. The rate lock confirmation from the lender will show you the mortgage rate, any discount points you will be required to pay, as well as any fees paid outside of closing to your mortgage broker. Be careful that the rate lock confirmation you get is in writing and comes directly from the lender, not your mortgage broker. Some dishonest brokers type up a bogus mortgage rate lock confirmation on their company letter head and try and pass it off as the lender’s mortgage rate lock. Also, if you have a “verbal” rate lock with your mortgage broker or a bogus written lock there is no way to be sure that you have actually locked in your mortgage rate. If you’re in this situation walk away and find another mortgage broker to arrange your loan.
Yield Spread Premium Drives up Your Mortgage Payment Unnecessarily
We’ve already discussed how your mortgage broker can receive a hidden commission for marking up your mortgage rate, but how does this drive up your monthly payment? Have a look at the following example to illustrate how this unnecessary markup can cost you thousands of dollars. Note that I’m saying “unnecessary” and “hidden” commission on your loan. Don’t get me wrong… I’m not saying your mortgage broker shouldn’t get paid for their work, that’s what the origination fee you pay is for. As for origination fees, one percent is a perfectly reasonable fee to pay for your mortgage broker’s services that won’t drive up your monthly payment.
Suppose for example you are refinancing your home for $315,000. Your mortgage broker quotes you an interest rate of 6.0% and charges you one percent for loan origination. That one percent origination fee is perfectly reasonable; however, what about your six percent mortgage rate? What your mortgage broker isn’t telling you is that you actually qualified for a 5.25 percent interest rate but the broker marked it up to get a commission from the lender. In this case, your mortgage broker receives one percent of your loan amount for every .25 they’ve overcharged you. Your broker walked away from this transaction with your one percent in their pocket plus three percent from the lender and you get stuck with a monthly payment higher than what it should be.
How much money is going down the drain on this home loan? With the mortgage loan you got at six percent on a thirty-year fixed rate deal your payment will be $1,900 per month. If you had the mortgage payment you deserve at 5.25 percent your payment would only be $1,740 per month! That’s a difference of $160 per month and a whopping $1,920 per year! The good news is that now you know about this hidden fee that drives up your payment and you can avoid it.
You can learn more about getting the lowest mortgage payment when refinancing your home by registering for my Underground Mortgage Videos. Register today and you’ll be on your way to saving thousands of dollars in markup and junk fees on your next home loan without downloading anything to your computer.