If you’re in the process of refinancing your home mortgage there are a number of expensive pitfalls you’re likely to encounter along the way. Doing your homework before refinancing will not only help you avoid refinancing headaches but save you thousands of dollars in the process. Here are several tips to help you avoid common mortgage refinancing headaches.
The biggest headache you’ll need to avoid when refinancing your mortgage is overpaying. Most homeowners never know that mortgage brokers mark up the interest rate wholesale lenders approved them to get a commission. Wholesale mortgage lenders reward brokers for closing loans with above market interest rates. The difference between the interest rate you were approved and the mortgage rate your broker closes with is called Yield Spread Premium.
Here’s an example to illustrate Yield Spread Premium in a typical refinancing transaction. Suppose you’re refinancing your home with a $250,000 thirty year fixed mortgage. Your mortgage broker quotes you an interest rate of 6.75% and charges you one point for the origination. Remember that one point is always one percent of your loan amount due at closing. While one point is a reasonable fee to pay for loan origination, what the broker isn’t telling you is that the wholesale lender approved you for a 6.0% mortgage rate. Your mortgage broker marked the interest rate up to 6.75%, without telling you of course, because the lender pays a bonus of one percent of your loan amount for every .25% you agree to overpay.
In this example your mortgage broker pockets the $2,500 you pay for loan origination AND $7,500 from the lender for overcharging you. For a couple hours work your mortgage broker walks away with $10,000 and you get stuck paying an above market mortgage rate for the entire time you keep this loan. There is good news for homeowners who do their homework can avoid this refinancing headache; you can avoid paying the unnecessary markup know as Yield Spread Premium by learning to recognize the markup and negotiating with a mortgage broker to pay an upfront fee when refinancing.
Watch out for Prepayment Penalties
Another source of refinancing headaches for many homeowners is the dreaded prepayment penalty. Before setting out to refinance your existing mortgage make sure your existing loan does not include a penalty for early repayment. Your loan originator might try to slip this penalty past you to get an incentive from the lender; however, unless you have poor credit and no other option, there is no reason whatsoever to accept a mortgage when refinancing that includes a prepayment penalty. Shrewd negotiating and cutthroat competition in the industry will ensure this is one refinancing headache you don’t have to face; don’t be afraid to remind your broker just how competitive it is out there.
Tell Your Mortgage Broker to Take Out the Trash
The final source of refinancing headaches we’ll discuss today are garbage fee. Chances are more likely than not, your Good Faith Estimate is littered with junk fees you don’t have to pay. If you find anything on your Good Faith Estimate that resembles an application fee, lock fee, broker courier fee, or computerized loan origination fee, these are garbage fees you should not be paying. Again, reminding your loan originator how much competition there is for your loan and telling them to take the trash out of your Good Faith Estimate will help you avoid many common refinancing headaches. You can learn more about your refinancing options and other headaches to avoid with my free refinancing toolkit. You can access the video toolkit by clicking the DVD image at the top of this page.