If you are considering refinancing your home mortgage loan you might be concerned about refi problems that can arise during the closing process. There are a number of junk fees and markup that can turn that new mortgage loan you’re applying for into an expensive mistake. Here are several tips to help you avoid Refi Problems that result in overpaying for your next mortgage loan.
Refi Problems
Most homeowners have no idea how the person arranging their mortgage is compensated for their work. Assuming you will not be refinancing your mortgage with a bank due to loopholes in the Real Estate Settlement Procedures Act which allows the bank to overcharge without telling you, the next mortgage you have will be arranged by a mortgage broker.
Mortgage brokers are paid for their work by two sources. Brokers can charge you a loan origination fee, often as much as five percent, which you will pay at closing for their part in arranging the loan. One percent is a reasonable amount to pay for loan origination, so don’t be afraid to bring this up when shopping for a loan. The second way mortgage brokers are compensated is with a fee paid by the lenders in the form of Yield Spread Premium.
Mortgage Yield Spread Premium
Mortgage lenders pay a fee to the broker for locking and closing your loan with an above market mortgage rate. You might think this isn’t a problem because the fee is not coming out of your pocket but you need to consider why lenders pay this fee. Lenders reward mortgage brokers for closing loans with above market mortgage rates because these loans bring them a premium profit when the loans are sold to investors on the secondary market. What you need to know about higher than market mortgage rates is that they result in a higher than necessary mortgage payment, a payment you’ll be making every month that you keep your loan.
Here’s an example to illustrate how Yield Spread Premium drives up your mortgage payment unnecessarily. Suppose for example you are refinancing your California mortgage for $350,000. The broker quotes you a mortgage rate of 5.75% and charges you an origination fee of 2%. This means you’ll have to fork over seven thousand dollars at closing for the mortgage broker’s fee. What your broker isn’t telling you is that you actually qualified for a 5.0% mortgage rate and they’ve marked it up to get a commission from the lender.
You might be asking “What’s a measly .75% between friends?” Here’s what that .75% on your mortgage rate does to your monthly payment. Your monthly payment with a mortgage rate of 5.75% on a 30 year fixed rate loan will be $2050. If you had gotten the mortgage rate you qualified for at 5.0% your monthly mortgage payment would be only $1,875 per month! That’s a difference of $2,100 every year that you keep this loan! Still think Yield Spread Premium isn’t a Refi Problem you need to be worried about?
Yield Spread Premium Can Be Avoided
It is possible to refinance your home loan without Yield Spread Premium paying the mortgage broker a flat one percent origination fee for their work. Homeowners who know how to do this are able to take advantage of the wholesale nature of mortgage rates and save thousands of dollars in unnecessary mortgage interest every year. According to the HUD Secretary Yield Spread Premium will be responsible for American homeowners overpaying nearly sixteen billion dollars this year alone! Don’t be a part of this statistic…register for the mortgage refinancing tutorial on this website and you’ll learn how to refinance you home with a wholesale mortgage rate without paying junk fees to the lender or the broker.
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.
