If you’re in a pinch to find a new mortgage you can save yourself many future headaches and thousands of dollars by doing your homework and researching loan offers. Many homeowners with Adjustable Rate Mortgages are feeling the pinch as lenders raise their payments in line with current interest rates. If you used one of these risky interest-only or option Adjustable Rate Mortgage to purchase your home, refinancing to a conventional fixed interest rate loan could give you financial peace of mind.
Many homeowners make the mistake of accepting the first favorable mortgage offer that they’re approved based on the interest rate alone. When you comparison shop for new mortgage make sure you compare all aspects of the loan offers, including closing costs. Also, because mortgage loans are sold on a commission basis, you need to avoid paying Yield Spread Premium. Yield Spread Premium is the markup of your mortgage interest rate by the loan originator and is one of the most important and frequently overlooked aspects of your mortgage loan.
Mortgage loans are retail products just like cars. There is a retail market where loans are sold by mortgage companies and brokers for wholesale lenders. Just like a car dealership, your mortgage company or broker marks your loan up to boost their profits. The problem with this markup is that you’re already paying origination fees for their services; paying Yield Spread Premium when mortgage refinancing is like paying double for your mortgage.
Here’s an example of how a typical mortgage transaction works. The mortgage company or broker that processes your application receives a specific mortgage rate from the wholesale lender that approves your loan. This is the actual interest rate you qualified for based on your credit and the financial details of your application. Your loan originator marks this interest rate up because the wholesale lender pays them a bonus of 1% of your loan amount for each .25% you agree to pay beyond what you qualified. This is an incentive to overcharge you. Stay tuned for Part 2 of this article where you’ll learn how you can avoid paying this unnecessary markup of your mortgage interest rate.
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.
