If you are homeowner considering whether or not to refinance your mortgage but don’t know how to get started, there are a number of things you need to know to avoid paying too much. This article will steer you in the right direction when deciding if a new mortgage is right for your situation; however, for detailed strategies on refinancing with a wholesale mortgage rate consider registering for my free video toolkit.
Should You Refinance Your Mortgage?
If you’re seeking advice on whether or not it makes sense to refinance your mortgage you may run across the so called “two percent rule.” Basically, this rule states that you should not refinance your existing mortgage unless the interest rate on the new loan is at least two percent lower than what you’re paying now? Is this good advice? Absolutely not.
The Two Percent Rule is Rubbish
Rather than focus entirely on a loan that is “two percent lower,” it makes sense to evaluate the new mortgage on a cost per savings basis. What this means is you look at how much lower your monthly mortgage payment will be and how long it will take you to recoup your expenses from refinancing. Here’s a simple example to illustrate this point.
Suppose you’re refinancing and your new payment amount will be $100 lower; however, it’s going to cost you $3,500 to close on the new mortgage. Is this new mortgage a good idea? Divide your total cost by the amount you’re saving ($3500/$100=35) and divide by 12 months per year (35/12=2.9). This figure tells you that it will take you almost three years to recoup your expenses from refinancing before you realize any savings.
Can you live with three years to recover your expenses? The answer should depend on how long you plan on keeping your home. If you plan on moving before the three year period is up you’ll lose money by refinancing your mortgage. Lowering your monthly payment isn’t the only reason for refinancing; some homeowners refinance with a higher mortgage rate to take cash back or even pay down their mortgage faster with a shorter term length.
What About Wholesale Mortgage Rates?
Another thing to consider is how you can qualify for a wholesale mortgage rate. Many homeowners don’t realize that mortgage loans are retail products just like the appliances you purchase for your home. What makes a mortgage loan “retail” is the markup your loan originator adds to your interest rate for their commission. You’re already paying origination fees for this person’s services; however, most mortgage brokers feel their work is worth a lot more of your money. This is why they markup your mortgage interest rate.
Yield Spread Premium is a Bad Thing
Since you’re already paying a perfectly reasonable origination fee for refinancing the loan there’s no reason you can’t keep the interest rate your wholesale lender approved you. When your loan originator marks up your interest rate the difference between the rate you qualified and the mortgage rate you close with is called Yield Spread Premium. Loan originators include this markup because the wholesale lender pays them a bonus for overcharging you. For every quarter percent you agree to overpay when refinancing this person receives a bonus of one percent from the lender. Accept a mortgage that includes Yield Spread Premium and you’ll pay above market interest rates for the entire time you keep the loan.
You can Refinance Your Mortgage With Wholesale Rates
Homeowners who understand Yield Spread Premium can negotiate to avoid paying this unnecessary markup when refinancing. My free mortgage refinancing toolkit teaches strategies for refinancing your home without paying too much. You can register for this free toolkit using the links found at the bottom and top of this page.
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.
