If you’re in the process of shopping for a new loan to refinance your existing mortgage, there are several things you need to know about the quotes you receive. Many homeowners don’t realize that mortgage loans are retail products and like anything else you purchase they’re marked up by the “middleman” for a profit. Here are several tips to help you recognize and avoid paying this markup when refinancing your mortgage.
When you request a mortgage quote online or in person the quote you receive should come from a wholesale mortgage lender that broker represents. The wholesale lender determines your interest rate based on your credit and the details of your application and provides this mortgage rate to your broker, who marks your rate up for a bonus. This markup is called Yield Spread Premium and is paid in addition to the origination fees you’re already paying for this person’s services.
The good news is that once you’ve learned how to recognize Yield Spread Premium on your Good Faith Estimate and HUD-1 settlement statement you can avoid paying it. There are several things you need to know in order to pull this off when refinancing. If you’re dealing with a mortgage broker make sure that person actually is a broker, not someone representing a bank. You can do this by asking if they close mortgage loans in their own name, or the name of their company. If the answer to either of these questions is “Yes” you are dealing with a bank and need to find a new broker.
Once you’re certain the mortgage company or broker you’re dealing with represents a wholesale mortgage lender and not a bank, you’ll need to get them to show you the Yield Spread Premium they’ve added to your loan. Most mortgage brokers will be extremely reluctant to disclose this markup of your mortgage rate because the commission they receive for overcharging you represents a significant portion of their income.
Your mortgage broker is legally obligated to disclose Yield Spread Premium on the Good Faith Estimate; however, because this document is just an “estimate” you will probably not get an accurate representation of the markup. The actual markup of your mortgage interest rate appears on the HUD-1 settlement statement. Yield Spread Premium is usually disclosed in the neighborhood of lines 810-812. Many mortgage brokers have clever ways of disguising this markup. You might see it called “broker rebate,” YSP, or YSP paid by lender. Don’t be fooled…this commission is being paid because your mortgage company or broker is overcharging you for the mortgage.
This so called POC charge or “Paid Outside of Closing” is the legal speak mortgage lenders use to justify the markup. Mortgage broker compensation paid by the lender outside of closing really comes out of your pocket in the form of a higher mortgage rate and payment amount. Your mortgage broker might even try and justify the expense by telling you that if the lender didn’t pay this fee it would end up in the “Cost to Borrower” column. What your mortgage broker isn’t acknowledging is that you’re already paying a perfectly reasonable origination fee for their services. Throw in Yield Spread Premium and you’ve got higher monthly mortgage payments for the next 15 to 30 years.
You can learn more about negotiating for a wholesale interest rate when refinancing your mortgage with my free mortgage toolkit. Register today by clicking the image of a DVD at the top of this page; the toolkit is yours free.