If you are in the market for a new mortgage loan, doing your homework before applying can literally save you thousands of dollars and many headaches. The mortgage industry has earned a reputation for sleazy sales tactics rivaling the worst used car salesman; most mortgage brokers today only care about pulling in a six figure salary regardless of who they step on. Here are several tips to help you avoid being taken advantage of when taking out a new purchase mortgage or refinancing your existing loan.
Tip Number One: Beware Bank Originated Mortgage Loans
Many people think banks and credit unions are the best places to shop for interest rates. While this can be true for savings accounts and CDs, taking out a mortgage from your bank or credit union is a very bad idea. Banks and credit unions are exempt from the Real Estate Settlement Procedure Act (RESPA) that protects homeowners from abusive lending practices by requiring mortgage lenders to disclose their profit margins and mortgage rate markup. The Banking Lobby spent millions of dollars making sure Congress excluded mortgage bankers from this important disclosure legislation; as a result your bank does not have to play by the same rules as other mortgage lenders.
Banks Charge Service Release Premium
Banks make the majority of their profit by selling mortgage loans to investors on the secondary mortgage market. Banks make the majority of this profit by charging above market mortgage rates. Your bank knows the mortgage rate you would qualify in the wholesale market; however, banks set their own rates to include the markup known as Service Release Premium. Because banks are exempt from RESPA they will never tell you how much they’ve marked up your mortgage interest rate. In fact, bank employees will often show you their rate sheets and swear their rates are not marked up. Only by comparing the bank rate sheet to the par rates charged by wholesale lenders can you see the bank’s markup. Why would you ever consider taking out a mortgage from someone that doesn’t have to play by the rules?
Tip Number Two: Mortgage Brokers Charge Yield Spread Premium
We’ve already established that mortgage bankers are evil, but what about mortgage brokers? Like your bank, mortgage brokers make the majority of their profit by marking up your mortgage interest rate. This markup of your mortgage rate is called Yield Spread Premium and is responsible for the sleazy pressure sales tactics used by mortgage brokers today. Mortgage brokers charge Yield Spread Premium because the lender pays them a bonus of one percent of your loan amount for every quarter percent they mark up your rate. Most brokers do this without telling you.
Mortgage brokers have clever ways of disguising their markup on the HUD-1 settlement statement and often leave it off the Good Faith Estimate altogether. When questioned about Yield Spread Premium many brokers become defensive, even angry, telling you that because this fee is paid by the lender and that you shouldn’t worry about it. What you should worry about is why this fee is being paid by the lender. The fee is paid because you are accepting an above market interest rate that could raise your payment hundreds of dollars each month unnecessarily. Did you know the Secretary of Housing and Urban development was recently quoted saying that homeowners overpay nearly sixteen billion dollars annually because of this markup?
How to Avoid Paying Yield Spread Premium
By avoiding this unnecessary markup of your mortgage interest rate you can refinance with a wholesale mortgage rate. Start by asking your mortgage broker what the “par” rate is and ask to see the rate sheet from the wholesale lender. Make sure the rate sheet you see is from the wholesale lender and not typed up on your mortgage broker’s company letterhead. Tell your broker that you understand how Yield Spread Premium works and will not tolerate the markup or any kind of “lender paid compensation” on your loan. It’s usually best to negotiate with a self-employed mortgage broker that owns their business as brokers working for large firms often lack the authority to make a deal like this.
If your broker agrees not to charge you Yield Spread Premium on your mortgage, you’ll have to pay an origination fee for their services. Origination fees are often inflated and a reasonable fee to pay is one percent of your loan amount. Also, look for anything on your HUD-1 that resembles an application fee, processing fee, rate lock fee, or broker courier fee. These are garbage fees that you do not have to pay.
Tip Number Three: Beware Internet Junk Fees
Many people think that taking out a mortgage online will save them money. While it’s true that the Internet is an excellent tool for researching loan offers, there are just as many people online trying to take advantage of you. The mortgage giant Lending Tree is a perfect example. First of all, Lending Tree is not a mortgage lender. They are involved in mortgage lead generation and if you read the Licenses and Disclosure Statement found on the website you can see how Lending Tree fleeces their customers.
Lending tree is so bad that the Attorney General of Massachusetts required them to post a statement in large black letters disclosing their fees. In this statement Lending Tree discloses that they are not charging you a fee directly for their part in arranging your loan; however, if you choose a lender from their “network” there will be a fee on your Good Faith Estimate for as much as $1300. This “Computerized Loan Origination Fee” is paid to Lending Tree at closing and is money (a lot of money) out of your pocket, just because you filled out a form on Lending Tree’s website.
Watch Out For Computerized Loan Origination Fees
Always read the fine print found in the disclosure statements when visiting mortgage websites on the Internet. If a website does not have a disclosure statement, consider this a red flag and move on. One example of a website without a disclosure statement is E-Loan. E-loan is not required to disclose for the same reason your bank is not required to disclose. E-loan operates as what is known as a “mortgage broker-bank.” This means E-loan closes the loan in their company’s name instead of a wholesale lender, and is exempt from the Real Estate Settlement Procedures Act.
Always ask your mortgage broker if they close in the name of a wholesale lender or their own company’s name. If the answer is that they close in the brokerage’s name you know that they are operating as a broker bank and do not have to play by the rules. Scratch this mortgage broker off your list and move on. If you would like to read more advice about refinancing your mortgage without paying too much, register for the free mortgage refinancing blueprint.