If you’re in the market for a new home loan and looking for mortgage refinancing company, there are several things you need to know before applying. The most important thing you need to know about mortgage companies is that they are all retail outlets for home loans. What this means is that the mortgage company you choose is simply reselling mortgage loans for a wholesale lender.
What Makes Your Mortgage Retail?
Many homeowners don’t realize mortgage loans are retail products. What makes the mortgage “retail” is the interest rate. Mortgage companies and brokers mark up wholesale interest rates to get a bonus form the lender. This “lender paid compensation” is called Yield Spread Premium and results in paying above market interest rates when refinancing your mortgage.
Why is Yield Spread Premium Bad?
The reason that agreeing to pay Yield Spread Premium when refinancing is a bad thing is that you’re already paying a perfectly reasonable origination fee for your mortgage company’s service. Lender paid compensation on your loan is paid as a reward for overcharging you. This is why agreeing to pay any amount of Yield Spread Premium should be avoided completely.
Here’s an example of the retail markup a mortgage refinancing company adds to your home loan. Suppose a homeowner refinancing their mortgage with a local mortgage company applies for $315,000. The mortgage company tells them they qualify for a 7.5% interest rate and charges them 1.0% of the loan amount or $3,150 for the origination fee. What this homeowner doesn’t know is that the wholesale mortgage company approved them for a 7.0% mortgage rate and their mortgage company is overcharging them. Your mortgage company will probably never admit to marking up your mortgage interest rate. If you know what to look for you can often find the markup in your Good Faith Estimate or on the HUD-1 settlement statement.
Why Charge Yield Spread Premium?
Mortgage refinancing companies can double, even triple their profit margins by overcharging you. They’re legally required to disclose their markup; however, they all have clever ways of disguising retail markup on your Good Faith Estimate and HUD-1. Wholesale lenders know that mortgage loans with higher than market interest rates bring in a premium profit when the loan is sold on the secondary market.
Fortunately for you, homeowners who understand how Yield Spread Premium inflates their interest rate can negotiate with mortgage refinancing companies to avoid paying the markup. Remember you’re already paying a perfectly reasonable origination fee for your mortgage companies services, any markup of your mortgage interest rate is not only completely unnecessary but is taking advantage of you. To learn more about choosing the best mortgage refinancing company for your situation without overpaying for your new loan register for my free video toolkit. You can find links for signing up at the top and bottom of this page.