Mortgage loan origination fees are a fee charged by the person arranging your loan and are a common way to overpay for your mortgage loan.
The origination fees you pay are just one of the ways mortgage brokers receive compensation for their work; there are other forms of compensation that raise your monthly payment and cost you thousands of dollars.
Here are several tips regarding Mortgage Loan Origination Fees to help you avoid paying too much for your next mortgage loans.
Mortgage Loan Origination Fees
Origination fees are also called origination points and are a fee charged by the person arranging your home loan at closing. Remember that one “point” is one percent of your loan amount. A reasonable amount to pay for mortgage loan origination fees is one point, or one percent of your loan amount; however, many brokers pad their fees and try and charge you much more. If you’re upfront with the broker when shopping around it is possible to find honest mortgage brokers willing to work for one percent.
Other Mortgage Broker Compensation
Mortgage brokers are basically salespeople reselling mortgage loans from wholesale lenders for a commission. Much like a salesman on a used car lot they’re looking to boost their commission in any way possible, even at your expense. This is the mortgage industry’s dirty little secret…lenders reward brokers that lock and close home loans with above market interest rates with a hefty commission. This commission often doubles, even triples the broker’s compensation from your loan…driving your monthly payment up unnecessarily.
Beware Yield Spread Premium
How does this unnecessary markup of your mortgage rate work? Did you know that for every .25 percent that your mortgage broker overcharges you the lender pays them one percent of your loan amount? That quarter point may not seem like much; however, many brokers don’t stop there and mark their loans up by as much as .75 percent or more. This markup adds hundreds of dollars to your monthly payment which is thousands of dollars you’re throwing away just to give the mortgage broker a bonus.
Mortgage brokers don’t talk about Yield Spread Premium because it is such a significant part of their bottom line. Many brokers become angry and defensive when questioned about Yield Spread Premium and have clever ways of hiding it in your loan documents. Were you charged a fee for locking in your mortgage rate and did the rate lock confirmation come on the broker’s letterhead? This is the first sign of a dishonest mortgage broker. Mortgage lenders DO NOT charge fees for locking in a mortgage rate… this “rate lock fee” is pure garbage. The fact that your rate lock confirmation did not come from the lender means the broker is hiding their markup of your mortgage rate because the lenders rate lock confirmation clearly shows any Yield Spread Premium associated with your mortgage rate.
How to Avoid Yield Spread Premium
Just like your origination fee, Yield Spread Premium on your mortgage loan can be negotiated. Look for mortgage brokers that are self employed working out of home or small office spaces. These brokers don’t have the overhead of large firms and are much more likely to negotiate with you on their fees. Tell the mortgage broker upfront that you will not accept any home loan that includes Yield Spread Premium and are willing to pay a one percent origination fee for their services. If the mortgage broker agrees to these terms when you lock in your rate make sure the rate lock confirmation comes from the lender and there is no Yield Spread Premium present on the lock.
What About Bank Mortgage Loans
Can’t you just avoid this entire mortgage broker hubbub by taking out your mortgage from a bank or credit union? While it is true banks are convenient when it comes to mortgage loans you’ll never get anything close to the deal you could get from a mortgage broker. Banks don’t charge Yield Spread Premium on their loans because they fund mortgage loans with the bank’s money; however, banks have their own markup, known as Service Release Premium. Your bank is not required to disclose anything about this markup to you due to a little known loophole in the Real Estate Settlement Procedures Act, meaning you’ll never know the rate you could have gotten from a mortgage broker.
Banks don’t offer their customer par mortgage rates, nor do most mortgage brokers. A par mortgage rate is one that doesn’t cost you discount points to get and does not create a commission for the broker from Yield Spread Premium. Getting a par mortgage rate for yourself is not as hard as you think; you don’t have to be a financial guru to negotiate a deal like the one I’ve described here… you just need to find the right mortgage broker for the job.
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Did you know that for every .25 percent that your mortgage broker overcharges you the lender pays them one percent of your loan amount?
I'm curious as to why you would phrase this bit of information as such. Why would you say "overcharge"? Mortgage brokers (and I've been one for 24 years) typically offer their borrowers a choice between less points and higher rate, or vice-versa. If a broker "overcharges", the broker won't be in business long. Reputation and the desire for repeat business (free market economy) makes brokers charge only the minimum fee.
I am referring to brokers that charge an origination fee and then take Yield Spread Premium without explaining what they're doing to get this "Paid Outside of Closing" fee from the lender. Unfortunately not every broker out there is honest and upfront with their customers.