If you are a homeowner considering mortgage refinancing you need to carefully research mortgage loans to avoid overpaying. There are a number of costly mistakes that result in paying too much for the new mortgage loan; however, careful comparison shopping will help you avoid most of these mistakes. Here are several tips to help you avoid overpaying for your new mortgage loan.
When mortgage refinancing there is no amount of comparison shopping will help you avoid paying the hidden cost of Yield Spread Premium. Only homeowners that understand how retail mortgages work are able to recognize retail markup and can avoid paying it. Here are the basics of retail mortgage loans.
Every mortgage company or broker you consider (with the exception of banks) is a retail vendor selling mortgage loans for wholesale lenders. This retail company is considered your loan originator and you will pay origination fees for their services. The origination fees you pay are more than ample compensation for originating your loan; however, retail mortgage vendors have a dirty secret that can result in your paying double for the new mortgage.
Your mortgage company’s dirty little secret is called Yield Spread Premium. When you apply for a new mortgage loan the wholesale lender qualifies you for a certain interest rate and provides your mortgage company or broker with a written guarantee. The company you are working with then provides you with a separate written guarantee of a higher interest rate. The difference between the interest rate guaranteed by the wholesale lender and the guarantee you receive from your mortgage company is called Yield Spread Premium.
Why do retail mortgage companies mark up your interest rate? For every .25% the retail mortgage company overcharges you they will receive a bonus from the wholesale lender of one point. One point is the equivalent of 1% of your loan amount. The mortgage company receives this bonus in addition to the origination fee you pay. Here’s an example of Yield Spread Premium in action.
Suppose you apply for a new mortgage and the wholesale lender your broker represents qualifies you for 6.25%. The mortgage company turns around and provides you a written guarantee of 6.75%. By marking up the mortgage interest rate by .50% this mortgage company receives 2 points from the wholesale mortgage lender as a bonus. If you were refinancing your home for $250,000 that mortgage company gets $5,000 in addition to the 1-1.5% of the loan amount you paid for the origination fees. As you can see, paying Yield Spread Premium effectively doubles your cost for the new mortgage loan.
To learn more about recognizing Yield Spread Premium and how to avoid paying too much for your new mortgage, register for our free mortgage guidebook “Five Things You Need to Know before Refinancing Your Mortgage.”
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.
