If you’re considering refinancing your mortgage for any reason and are thinking of taking out the new loan from your bank, there are several very good reasons why you should not do this. While it’s true that mortgage brokers have a reputation for overcharging their customers, banks are actually worse due to loopholes the laws requiring lenders to disclose their profit margins. Here are several tips to help you avoid paying too much when refinancing your home mortgage loan.
Real Estate Settlement Procedures Act (RESPA)
You might have heard of the Real Estate Settlement Procedures Act which requires mortgage lenders to disclose their fees and markup. What you might not know is that thanks to the Banking Lobby your bank is exempt from this legislation and not required to disclose any this information to you. Banks take full advantage of this loophole in the law by charging their customers the interest rate markup known as Service Release Premium. Fortunately, once you understand how wholesale mortgage rates work this markup is easy to recognize.
What is Service Release Premium (SRP)?
Banks are in the mortgage business to make money. Banks know the rates that other lenders offer and they know the rate you could get from a wholesale lender. The mortgage rate your bank offers is marked up to include Service Release Premium.
This is a “premium” mortgage rate and is designed to boost the banks profits when your mortgage loan is sold to investors. Once you close on your mortgage the bank immediately turns around and sells your loan on the secondary market.
Banks know that loans with above market mortgage rates bring them higher profits and this is why Bank mortgage rates will never be competitive. Banks rely on the fact that the majority of homeowners do not understand mortgage rates and that they are exempt from the Real Estate Settlement Procedures act to fleece their customers out of thousands of dollars.
Don’t Trust Your Banker’s Rate Sheets
Most bank employees have never heard of Service Release Premium and will swear to you that their rates have not been marked up. They will even show you the Bank’s rate sheets for that day claiming that their rates are competitive. The problem with the Bank’s rate sheets is that they already have Service Release Premium built into them. Only by comparing the banks rates to the wholesale mortgage rates offered by a broker can you spot the bank’s markup. Because the bank is not required to disclose their markup of profit margin for your loan you will never know exactly what your bank is charging.
Upfront Mortgage Brokers Can Save You Thousands
Most mortgage brokers do not offer their customers wholesale rates. Just like banks these mortgage brokers mark up the interest rate to earn a commission from the lender. When this markup is made by a mortgage broker it is called Yield Spread Premium. Because you are already paying this person an origination fee for arranging your loan, the markup is not only unnecessary, but is dishonest.
There are honest mortgage brokers willing to work for a one percent origination fee. These brokers are frequently called “Upfront Mortgage Brokers” because they disclose a flat fee upfront and do not charge Yield Spread Premium with their loans.
You can learn more about refinancing your mortgage without paying Service Release Premium or Yield Spread Premium by registering for my free mortgage refinancing videos.
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.
