Continuing with my series on mortgage refinancing for the first time homebuyer I’ll pick up where I left off with mortgage terminology you need to know. If you missed part one you can catch up with Mortgage Refinancing for the First Time Homebuyer.
Advanced Mortgage Terminology
There are several terms related to key concepts you need to know before refinancing your mortgage. Among these concepts is the markup your mortgage broker adds to your interest rate to get a commission from the wholesale lender behind your loan.
Yield Spread Premium – This markup puts the “retail” in your mortgage loan. When the wholesale lender approves your application you qualify for a specific mortgage interest rate. Your broker knows this interest rate (many pretend they don’t) and marks it up because the wholesale lender pays a bonus of one percent of your loan for every quarter percent you agree to overpay. Homeowners who avoid paying Yield Spread Premium are able to refinance with a wholesale interest rate.
Service Release Premium – Similar to the Yield Spread Premium this is the markup added to your mortgage interest rate by a bank or broker-bank. Remember banks are exempt from the Real Estate Settlement Procedures Act and are not required to tell you that they’ve marked up your interest rate. Banks do this because they make the majority of their profit selling your loan on the secondary market; loans with above market interest rates make them the most money. What’s a broker bank? This is simply a bank pretending to be a mortgage broker.
Points – This is a fee you’ll be required to pay at closing. Points come in two varieties: you’ll pay origination points to the broker for their work on your loan and you may be required to pay “discount” points to the lender. Discount points are typically paid in exchange for something like a lower interest rate; however, some homeowners may find they are required to pay points for loan approval. One point is always one percent of your loan amount.
Garbage Fees – These are fees your loan originator or lender tries to “slip past” you. You’ll find your Good Faith Estimate loaded with unnecessary fees. Examples of common garbage fees are application fees, lock fees, and broker courier fees.
That’s all for mortgage terminology; in part three of this series on mortgage refinancing for the first time homebuyer I’ll cover strategies for comparison shopping for mortgage brokers that don’t unnecessarily markup your interest rate with Yield Spread Premium. You can learn more tips for refinancing without paying too much or being taken advantage of with my free mortgage refinancing toolkit. Simply click the DVD image at the top of this page for immediate access to the videos, free with no obligation.
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.
