If you are in the market to refinance your mortgage loan, doing your homework and researching mortgage offers will help you avoid many of the mistakes other people make with their mortgage loans. Doing your homework means learning mortgage terminology and how mortgage companies and brokers make their money.
The most important lesson you can learn before refinancing your mortgage is how to avoid Yield Spread Premium. If you’re already familiar with Yield Spread Premium you know that mortgage originators mark up your mortgage interest rate to get a higher commission from the wholesale mortgage lender. Here’s how Yield Spread Premium works: the wholesale lender qualifies you for a specific mortgage rate and provides that rate to your Mortgage Company or broker. Your loan originator marks up the interest rate because the wholesale lender pays them a bonus of one percent of your loan amount for every .25% you agree to overpay.
Do you think your loan representative is going to tell you this is going on? Nope, and the odds of you finding it buried in the mortgage company’s disclosure statements aren’t good either. How can you spot and avoid paying Yield Spread Premium? Tell your loan representative that you pay a reasonable origination fee for their services but will not pay any markup of your mortgage rate by their company. A reasonable origination fee is 1.5% of the mortgage amount.
If your loan representative agrees to your terms how can you tell if the mortgage rate quoted does not include markup? You can find out the current mortgage rate by checking the weekly yield on Fannie Mae’s website and comparing it to your mortgage rate. The link to Fannie Mae’s website in the links section of this page. Next, ask your loan representative to see the rate sheet from the wholesale mortgage lender. Compare the rate on this sheet to the weekly yield from Fannie Mae and the mortgage rate on your Good Faith Estimate. If the mortgage rates are different your loan representative is not being completely honest with you. You can learn more refinancing basics with our free mortgage tutorial.