Understanding the basics of the mortgage refinancing process will help prepare you for choosing the right mortgage loan for your situation. The process of obtaining a mortgage can be complicated; however, the basics are simple to understand. The little bit of knowledge you learn today could save you thousands of dollars in unnecessary finance charges. Here are several basic terms you need to understand before applying for a new mortgage loan.
Term Length: Your mortgage has a length of time for repayment. Your payment amount is based on this length of time; the amount you pay is inversely proportional to your term length. Longer term lengths have lower payments and shorter term lengths have higher payments. Common term lengths are 15 or 30 years; however, there are now 40 and 50 year terms to choose from.
Interest Rates: Your mortgage rate determines how much it will cost you to borrow over time. There are two basic types of interest rates, fixed or adjustable. Adjustable mortgage rates change over time and are typically lower than fixed rate loans at the beginning of the loan.
Yield Spread Premium: This is the markup your mortgage company or broker adds to your interest rate for their commission. Yield Spread Premium is a completely unnecessary and deceitful practice because you are already paying origination fees for the loan originator’s services; however this markup is perfectly legal and widely practiced.
Negotiate to Avoid Paying Yield Spread Premium
When shopping for a new mortgage it is important to ask the right questions before choosing a lender. Tell your loan representative that you understand how Yield Spread Premium works and will only pay a reasonable origination fee. A reasonable origination fee would be one percent of your mortgage amount. When negotiating with a potential broker always try and negotiate with the owner of the brokerage firm. You can learn more about refinancing your mortgage without overpaying with our free 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.
