If you are in the process of refinancing your home loan, doing your homework can save you thousands of dollars. Learning mortgage industry lingo is an important part of doing your homework. If your loan representative perceives that you know what you’re doing (even if you don’t) they will be less like to try and take advantage of you. Think of a mechanic overcharging someone that clearly doesn’t know the first think about maintaining their car; the same principle applies to mortgage loans.
Here are key mortgage industry terms you need to understand to avoid being taken advantage of when refinancing your mortgage.
- Loan Originator – This person that does the grunt work of arranging your loan with a wholesale lender. This person could be a mortgage broker, loan representative at a mortgage company, or a mortgage banker. With the exception of the mortgage banker, loan originators are compensated by the origination fees you pay and by the Yield Spread Premium they attach to your loan.
- Origination Fee – (Also called Origination Points) This is the fee you pay for your mortgage company or broker’s part in arranging your loan. A reasonable origination fee is one percent of your loan amount. Anything more and your loan representative is overcharging you.
- Yield Spread Premium (YSP) – This is the retail markup of your mortgage interest rate for a commission. Routinely practiced by mortgage companies and brokers alike, wholesale lenders pay 1% of the loan amount for each .25% the interest rate is marked up. Mortgage companies and brokers are required to disclose this markup; banks are not.
- Service Release Premium (SRP) – When your mortgage rate is marked up by a bank the markup is called Service Release Premium. Similar to Yield Spread Premium, banks have different motivation for overcharging you. Banks make the majority of their profits selling mortgages to investors on the secondary market. Mortgage loans with above market interest rates bring the bank a premium profit.
- RESPA – The Real Estate Settlement Procedures Act requires lenders to disclose all fees and markup associated with your mortgage. The Banking Lobby spent millions of dollars to change the law so that banks are exempt from disclosure laws. If you refinance your mortgage with a bank, the only one who will know how much you’ve been overcharged is the bank.
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.
