No fee mortgage refinancing sounds like a great deal; however, as most homeowners quickly learn, there are no free lunches when it comes to your mortgage loans. Most of the so called “no fee” mortgages you see advertised simply trade off a higher mortgage rate for the lender’s share of closing costs. Every mortgage has fees, the difference is you can choose to pay these fees now or keep paying them for the entire duration of your loan.
There are several circumstances where no fee mortgage refinancing can be used to your advantage. You can use Yield Spread Premium (YSP) to pay your fees if you’re in a pinch and need to refinance. This is an expensive way of paying your closing costs and may not work in every situation; however, if it helps you save your home from a risky adjustable rate mortgage the tradeoff will be worth it.
If you’re not already familiar with Yield Spread Premium it is the markup your mortgage broker adds to your interest rate to get a commission from the lender. When a wholesale lender approves your mortgage you qualify for a specific mortgage rate. Your broker knows this rate but most will quote you a higher interest rate without telling you what you’ve qualified, pocketing the commission from the lender at your expense.
An honest mortgage broker has the ability to structure your loan where the commission from the lender is used to pay your closing costs. Sure, you’re accepting an above market interest rate; however, for every .25% you agree to pay above the mortgage rate you qualified the broker gets 1% of the loan amount back. You’ll have to pay the broker an origination fee for their services; however, Yield Spread Premium can be used to pay your refinancing expenses. Here’s an example of how Yield Spread Premium can be leveraged to your advantage.
Suppose you qualify for a 6.0% mortgage rate when refinancing your loan from the wholesale lender. If you agree to pay 6.75% your broker will receive a commission of 3% of your mortgage amount. On a $200,000 mortgage the Yield Spread Premium in this example provides $6,000 which is more than enough to cover your closing costs. This assumes you’re working with an honest mortgage broker that agrees to let you use this money to pay your closing costs.
You can learn more about your mortgage refinancing options, including costly pitfalls to avoid with my free mortgage toolkit; register today, the video tutorial is yours 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.
