If you are considering mortgage refinancing with a Mortgage Broker, understanding how retail mortgage loans work can save you thousands of dollars. Mortgage Brokers routinely markup the interest rate quoted to them by wholesale lenders they represent. This retail markup of your interest rate by the Mortgage Broker is called “Yield Spread Premium,” and is a fancy term for ripping you off. Here are several tips to help you avoid paying retail markup on your next mortgage when dealing with a Mortgage Broker.
Let’s face it, many homeowners rush through mortgage refinancing without doing proper homework for such a major purchase. Relying on a Mortgage Broker to find you a loan is the ultimate convenience; sadly, Mortgage Brokers don’t have your best interest at heart when it comes to your interest rate.
Mortgage loans are simply retail products just like televisions or toasters. If you can adopt the same mentality when purchasing a new TV with your Mortgage Broker, you can save yourself a lot of money and headache. Now, you may ask how does the Mortgage Broker overcharge you when everything is spelled out on the Good Faith Estimate? To answer this question you need to understand how the retail side of the mortgage industry works. When you deal with a Mortgage Broker they will contact a wholesale lender on your behalf, that lender qualifies you for a specific interest rate. The wholesale lender gives your Mortgage Broker a written interest rate guarantee. The Mortgage Broker turns around and gives you another written guarantee for a higher rate.
Here’s the big problem. The higher interest rate is going to cost you thousands of dollars and the Mortgage Broker pockets a bonus for ripping you off. Sadly, that’s how Yield Spread Premium works and if you haven’t learned how to recognize and avoid paying retail markup of your mortgage, you are being cheated by your Mortgage Broker.
Here’s the scenario. Suppose you are applying for a mortgage with a Mortgage Broker and the wholesale lender that Mortgage Broker represents qualified you for a 6.25% interest rate. The Mortgage Broker marks up your interest rate to 6.75% on a $275,000 mortgage loan. You pay the Mortgage Broker origination fees of 1.5%, all the while thinking you got a good deal. What’s more, only the Mortgage Broker and the lender know that you were overcharged .50% on your loan. The Mortgage Broker receives a bonus of one point, or 1% of your loan amount for every .25 you overpaid. In this example, the Mortgage Broker receives $5,500 as a bonus for ripping you off. As if that’s not enough, the Mortgage Broker pocketed your origination fee.
Now I don’t know about you, but I hate overpaying for anything. How do you avoid overpaying for your next mortgage loan when working with a Mortgage Broker? Register for our free mortgage guidebook: “Five Things You Need to Know,” and you’ll learn how to refinance while avoiding costly mortgage mistakes.