Paying closing costs when refinancing your home means you’re coughing up cash to pay the loan origination fee for your home mortgage. What about these banks and brokers that advertise no fee home loans? You’re probably asking what’s the catch, right? There are no free lunches when it comes to paying mortgage fees; here’s what you need to know about so called “no-fee” mortgage loans to help you avoid overpaying for your next home loan.
How Much is a Reasonable Loan Origination Fee?
Brokers and other loan originators deserve to be paid for their work. This doesn’t mean they should be taking advantage of their customers by charging an outrageous loan origination fee and taking a kickback from the mortgage lender at your expense. What’s a reasonable fee when refinancing your home? One percent of your home loan amount and not a penny more. This one percent loan origination fee assumes your broker isn’t taking Yield Spread Premium as well. Don’t worry if you’re not familiar with Yield Spread Premium, I’ll explain that in a moment.
Mortgage Broker Compensation
You already know that brokers and other loan originators are compensated by charging a loan origination fee, but did you know they’re also paid a fee by your lender for overcharging you? Brokers receive a fee known as Yield Spread Premium for locking and closing home loans with higher than necessary interest rates in addition to the origination fee they’re already charging you. Honest brokers explain your options as well as how this fee affects your home loan; however, many shady loan originators explain it away and tell you not to worry about it since it’s not coming out of your pocket.
How does Yield Spread Premium work? Your loan originator receives a fee of one percent of your loan amount for every .25 percent they markup your mortgage rate. Some homeowners trade paying the loan origination fee for Yield Spread Premium and some unknowingly pay both. What does allowing Yield Spread Premium on your home loan mean for your bottom line and does paying the loan origination fee up front have an advantage long term? Here’s an example to illustrate the pros and cons of both.
Loan Origination Fee vs. Yield Spread Premium
Suppose you’re refinancing your home for $350,000. Assuming you have an honest mortgage broker willing to work for a flat loan origination fee without taking Yield Spread Premium on your home loan the origination fee to refinance would be $3,500 and on a fixed, 30 year mortgage would get you an interest rate of 5.5%. What if you don’t have the $3,500 and take a 6.0% mortgage rate in exchange for a “no fee” home loan. The mortgage broker pockets 2% of your home loan amount in this example and walks away with $7,000 from the lender. You save $3,500 at closing and everyone wins right?
Not so fast. A simple mortgage calculator shows what this no origination fee mortgage loan will cost you in the long run. If you had paid the $3,500 origination fee at closing to get the 5.5% interest rate your payment on a fixed, 30 year mortgage would be $1,987. The no origination fee deal gets you a 6.0% interest rate with a monthly payment of $2,098 per month. That’s a difference of $1,332 per year. If you take the no fee option you’ll be paying the loan origination fee over and over again every three years! Save your money, just say no to Yield Spread Premium.
You can learn more about avoiding an unnecessary origination fee and markup with my free Underground Mortgage Videos.
Here’s a short video that’ll show you how to avoid expensive mistakes nearly every one of your neighbors is paying too much for.
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.
