If you are considering mortgage refinancing with a broker, there are several things you need to know to avoid overpaying for the new mortgage loan. When you understand how retail mortgage loans work, it is easy to spot excessive markup and fees that mortgage companies and brokers slip into their loan offers. When dealing with a mortgage broker, the first thing you need to determine is if the person you are dealing with actually a mortgage broker, or a bank pretending to be a broker. Broker-banks are banks masquerading as mortgage brokers. Broker-banks do this to take advantage of loopholes in the Real Estate Settlement Procedures Act that protects homeowners from the abuses of predatory mortgage lenders.
The way to tell if your broker is actually a mortgage broker and not a bank is to ask if the company closes on mortgages in their own name. If the broker closes on the loan in their own name you know the broker is really a broker-bank. Never refinance your mortgage with a bank or broker bank.
Once you have decided on a mortgage broker you are certain is not a bank, you need to understand how your broker will be compensated. When refinancing your mortgage you will be required to pay origination points for the new loan. This fee is paid to the broker or mortgage company for originating your loan. Mortgage companies and brokers should be compensated for finding you a loan; however, brokers take this compensation too far when they get a bonus for overcharging you.
The way mortgage brokers overcharge you is by inflating the interest rate you receive on the new loan. When a mortgage lender qualifies you, they provide the broker with a guaranteed interest rate. The broker will mark this interest rate up and pass you a separate guarantee on an inflated interest rate. Mortgage brokers do this because the lender gives them a bonus of 1 point for every .25% they overcharge you on the interest rate. This mark up on the interest rate you receive is called Yield Spread Premium (YSP).
How can you avoid paying Yield Spread Premium? Tell the mortgage broker you will pay the origination points and closing costs, but will not pay YSP. Ask your mortgage broker to see the original interest rate guarantee from the wholesale lender and compare it to the one provided by your broker. Also, pay close attention to the interest rate quoted on the Good Faith Estimate and HUD-1 statement. By carefully examining these documents and using a broker that agrees not to charge you YSP you can save yourself thousands of dollars on the new mortgage loan. To learn more about refinancing your mortgage while avoiding common mistakes register for our free mortgage guidebook: “Mortgage Refinancing – What You Need to Know.”
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.
