When the Federal Reserve lowers short term interest rates mortgage refinancing becomes a hot topic for many homeowners. If you are considering refinancing your mortgage but are concerned about paying too much there are several things you need to know about shopping for a new home loan. Here are several tips to help you refinance your home loan without paying garbage fees or unnecessary markup of your mortgage rate.
Banks vs. Mortgage Brokers
The first thing you need to know is that you should never take out a mortgage from a bank or broker bank. Banks are exempt from the Real Estate Settlement Procedures Act and are not required to disclose their profit margins or markup of your mortgage rate. If you refinance your home loan with a bank you’ll never get a wholesale mortgage rate or anything close to it. The same is true of broker banks.
What’s a broker bank? This is basically a mortgage company or broker operating as a bank. Many mortgage companies and brokers changed their businesses when the law changed in order to take advantage of the same loopholes as banks. The only way to recognize if your mortgage company or broker is acting as a broker bank is to ask if they close on the mortgage in the name of the company or the wholesale lender. If the answer you get is that they close in their own company’s name you are dealing broker bank and cannot refinance with wholesale rates.
The biggest secret your mortgage broker is keeping from you is called Yield Spread Premium. This is the industry term for the commission your mortgage broker receives for marking up your mortgage interest rate. Brokers do this because lenders pay one percent of you loan amount for every .25 percent they overcharge you…something they do without telling you. There are ways to recognize this markup of your mortgage rate, and it is possible to avoid paying it when refinancing.
How to Recognize Yield Spread Premium
Your first opportunity to spot Yield Spread premium is on the Good Faith Estimate; however, many brokers intentionally omit it from this document. If you can get your hands on the rate lock confirmation from the lender, Yield Spread Premium is clearly disclosed; however, many brokers falsify rate lock confirmation to omit this markup. The last chance you’ll have to spot this markup is on the HUD-1 statement. If Yield Spread Premium is included with your loan it will be listed on lines 810 or 811 of this document. You may see it called a “broker rebate” or YSP paid to broker but this dollar amount is the kickback your broker receives for overcharging you.
Yield Spread Premium Can Be Avoided
Homeowners who learn to recognize Yield Spread Premium can negotiate with potential mortgage brokers to avoid paying it. You can learn more about refinancing your home loan without paying too much by registering for our free mortgage tutorial.
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.
