A well known science fiction author was once quoted saying that 90% of everything is crap. This quote became known as Sturgeon’s Law and can even be found in today’s Oxford English Dictionary. Most Internet users will tell you Sturgeon’s Law is alive and well when it comes to the web; the overwhelming majority of sites are simply crap thrown together for the sake of contextual advertising. That’s neither here nor there, as we’re here to talk about mortgage advice.
It seems like everyone and their brother-in-law has a mortgage site peddling advice on how to lower your payments or find a good lender when refinancing. While some of the advice you read online can save you money by encouraging you to do your homework and shop around, Sturgeon’s law is alive and well when it comes to mortgage advice. I recently read an article encouraging homeowners to find a mortgage company where the loan representatives are not paid on commission.
The author claimed the employees at this company would be less likely to take advantage of you and would your best interest at heart for the new loan. While this sounds like lovely advice, it’s complete rubbish and will almost guarantee that you overpay for the new mortgage loan. This is bad advice because mortgage loans are not sold on a commission basis, they are marked up much in the way your appliance store marks up a kitchen appliance. The retail markup of mortgage loans is called Yield Spread Premium and here’s an example of how it works.
Suppose you are refinancing your mortgage loan for $200,000. Your mortgage company or broker quotes you an interest rate of 6.5%, and you pay 1.5% of the loan amount in origination fees. Sounds reasonable right? Think again; what the mortgage company isn’t telling you is the wholesale lender actually qualified you for 6.0%, but the retail mortgage company marked it up to 6.5%. Because you agreed to pay an extra .5% in interest, that mortgage company receives two points from the wholesale lender on top of the 1.5% you paid in origination fees. One point is 1% of the loan amount and that mortgage company got $4,000 because they duped you into overpaying for your loan.
Telling you that a mortgage company is “non-commission” is just a slick marketing trick to win over your misguided trust in the company or broker. You won’t pay the representative a commission, but you will pay double for the new mortgage loan. How can you avoid bad mortgage advice and overpaying for your next mortgage? Register for our free mortgage guidebook and learn the straight facts about mortgage refinancing, without Sturgeon’s law.