Rather than looking at the big picture when refinancing their mortgages many homeowners obsess over interest rates without fully understanding how mortgage rates work. This creates a number of problems when refinancing including paying unnecessary fees and markup of your mortgage rate. Here are several tips to demystify mortgage rates and help you find the best deal when refinancing your home.
There is nothing mystical about mortgage refinancing. You’re simply replacing your existing loan with a new mortgage. This loan could come from a different lender or with your current lender. If you like your current lender and have made all your payments on time you might wonder if calling up your lender and asking for a lower rate would save you the trouble of refinancing.
Unfortunately the answer is no because in order to refinance your mortgage you have to qualify for the mortgage all over again. If anything with your financial situation has changed since you purchased your home it could make the process more difficult. This includes any life altering event such as marriage, divorce, self-employment, running up your credit cards, or economic factors beyond your control like declining home values.
When you apply for mortgage refinancing the loan underwriter will evaluate your current financial situation prior to approving your loan and determining your mortgage rate just as was done when you purchased your home. Because you are going through the mortgage process again you will have to pay many of the same lender fees and closing costs as you did before. These are the expenses commonly overlook by homeowners obsessing over getting the best “mortgage interest rate.” These costs include credit reports, appraisals, loan processing, and retail markup of your mortgage interest rate.
No Cost Mortgage Myth
There is no such thing as a “no cost mortgage” and anyone who tells you different is selling you an above market interest rate. No cost refinancing is simply a marketing trick designed to distract your from paying too much for your mortgage rate. Lenders charge above market rates to boost their profits when your loan is sold on the secondary market. While it’s true that you won’t have to fork over cash at closing, you’ll pay much more in finance charges for the entire duration of your mortgage.
Watch Out For Yield Spread Premium
The unnecessary markup of your mortgage interest rate by the person originating your loan is called Yield Spread Premium. This markup serves no other purpose than to give this person a commission for overcharging you. Most brokers do not disclose their markup of your mortgage rate on the Good Faith Estimate and they all have clever ways of disguising the fee on the HUD-1 statement. How does Yield Spread Premium work? For every .25% you agree to overpay with your mortgage interest rate the wholesale lender pays your broker a commission of 1% of your mortgage amount.
Yield Spread Premium is paid in addition to any origination fees you’re responsible to pay and because this fee comes from the lender many brokers tell you not to worry about it because it’s not coming out of your pocket. The problem with this reasoning is not the fact that the fee is being paid but why the lender pays it in the first place. Yield Spread Premium is paid to your mortgage broker because you’re agreeing to pay an above market interest rate…not exactly a win-win situation.
How do you avoid Yield Spread Premium when refinancing your mortgage? Start by telling your mortgage broker that you understand how this markup works and will not accept any loan with it. Ask your mortgage broker to see the mortgage rate sheets from the wholesale lender and don’t be fooled by rate sheets on the broker’s letterhead. You can learn more about your mortgage refinancing options, including costly pitfalls to avoid by registering for this free video tutorial.
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.
