Are you considering a new mortgage loan for your home but want an answer to the question how are mortgage rates determined before refinancing? It might surprise you to find out that mortgage rates have less to do with your credit score and more to do with how greedy the person arranging your home loan is; however, it’s true. Here’s what nearly every mortgage broker in the business hopes you don’t know about your question “how are mortgage rates determined…”
How Are Mortgage Rates Determined Anyhow?
Assuming you have the minimum credit score necessary to qualify for a traditional mortgage loan and meet the loan requirements as far as equity the mortgage rate you get has nothing to do with your credit and everything to do with the person arranging your loan. Your mortgage rate is also determined by the type of mortgage loan originator that you choose. The loan originator is the person arranging your loan: it could be a mortgage company, mortgage banker, or a mortgage broker. Different loan originators are compensated for your home loan in different ways.
Choose a bank to refinance your home loan and you’ll get a mortgage rate that’s been marked up to create a profit for the bank in the form of Service Release Premium. Banks make the majority of their profits from home loans that they close with higher than market mortgage rates when the loans are sold to investors on the secondary market. This “extra” profit is called Service Release Premium and is similar to the Yield Spread Premium that other mortgage companies and brokers collect from lenders when they close home loans with higher than necessary rates.
What kind of mortgage rate should you shop for when refinancing your home? What you want is a wholesale mortgage rate which in the business is called a “par” mortgage rate. Par mortgage rates are simply mortgage rates that you don’t have to pay points to qualify for and do not create Service Release Premium or Yield Spread Premium for whoever arranges your loan. Getting a par mortgage rate for your home isn’t as difficult as you might think…you don’t have to be a financial “guru”…you just have to find the right person to arrange your next home loan.
Understanding Mortgage Rate Sheets
Your mortgage broker probably won’t give you an honest answer to the question “How Are Mortgage Rates Determined” nor will they show the mortgage rate sheets they’re quoting you from. The reason for this is because the rate sheets they get from wholesale lenders quote that lender’s rates with varying degrees of Yield Spread Premium. The broker quotes you a mortgage rate based on what they think you’ll be willing to overpay for the mortgage loan. Sound like a used car salesman? That’s really all most mortgage brokers are…used car salesman taking advantage of their customers with Yield Spread Premium.
Mortgage Yield Spread Premium
How does Yield Spread Premium work? For every .25% that you agree to overpay for your home loan the wholesale lender pays your mortgage broker 1% of your loan amount. This is paid on top of the origination fee and any junk fees you agree to pay. Not coincidentally, nearly all of the junk fees you find in mortgage offers today come from the mortgage broker, not the lender. Our friend the used car salesman rears his ugly head once again as a mortgage broker. How can you avoid Yield Spread Premium when refinancing your home loan and walk away with a par mortgage rate?
You can do this by finding the right mortgage broker for the job. Banks and credit unions simply do not give par mortgage rates to their customers and most mortgage companies are simply unable or unwilling to give you a par mortgage rate. You’ve got to work with a mortgage broker if you want the lowest possible mortgage rate. Finding the right mortgage broker for the job isn’t hard either. Look for small-time, self employed mortgage brokers. Find one that works out of their home? Even better.
These small-time mortgage brokers don’t have the expensive overhead or ridiculous company hummers and will be much more likely to negotiate the kind of deal you’re looking for that doesn’t include Yield Spread Premium.
You can learn more about answering the question how are mortgage rates determined for yourself without paying unnecessary fees by checking out my free Underground Mortgage Refinancing Videos.
Here’s a sample you need to know about this unnecessary markup of your mortgage rate for kickback from the lender known as Yield Spread Premium. Register for these mortgage videos today while this is still a free offer.
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.
