Should you pay that mortgage origination fee when taking out a new home loan to purchase or refinance? Many homeowners opt for no closing cost home loans because they don’t have to fork over cash at closing; however, these loans can get quite expensive in the long-term if you don’t fully understand what you’re getting into. Here are several tips to help you avoid the expensive pitfalls that come with a no mortgage origination fee home loan.
Mortgage Origination Fee Definition
What is the mortgage origination fee? The person arranging your loan is known as the loan originator by the fat cats in the business, and the fee they receive for arranging your home loan is the mortgage origination fee. While there is no industry standard for this mortgage origination fee, it’s easy to find brokers and other companies charging as much as 2-3 percent; however, you should know that one percent is more than reasonable compensation for the broker’s work on your home loan.
So what about these no closing costs home loans? How is the person arranging your home loan paid? After all, as a homeowner I’m sure you’ve seen that there are no free lunches when it comes to anything related to your finances. The problem with no mortgage origination fee home loans is how much you’ll be paying out in the long run. The broker arranging your home loan is going to get paid no matter what, and if you’re not paying the closing costs that means the lender is footing the bill. What’s wrong with that you ask?
After all, if the fee’s not coming out of your pocket why should you care? The problem with no closing cost home loans isn’t that the fee is coming out of someone else’s pocket, it’s why they’re paying this fee for you. Always ask: “what’s in it for them,” right?
Mortgage Yield Spread Premium
There is a little known fee called Yield Spread Premium or YSP, which is the lender paid compensation for your broker. When you take out a home loan without paying the mortgage origination fee, you’re trading a higher mortgage rate in exchange for Yield Spread Premium paid to your broker. This usually works out to a payment of 1% for every .25% markup you accept in exchange for no closing costs. That’s no biggie; what could that tiny markup do to my monthly payment?
Here’s an example to illustrate the problem with no closing cost home loans. Suppose you are refinancing your home loan for $315,000 and opt for the no closing cost home loan. Your broker quotes you a mortgage rate of 6.5% and since there is no mortgage origination fee you’ll be saving $4,725 at closing assume the broker would have charged you 1.5%. Your payment on a 30 year fixed rate mortgage in this example will be $1,358 per month.
What you might not know is that had you paid that mortgage origination fee of $4,725 you would have walked away with an interest rate of 5.75%. The same 30 year, fixed rate home loan at 5.75% would have a monthly payment of $1,254. That’s a savings of $1,248 per year. The difference in your payments means by opting for the no closing cost home loan you’ll be paying that $4,725 over and over every four years for as long as you keep your home loan. Sill think that no mortgage origination fee home loan is a good deal?
You can learn more about purchasing or refinancing your home with a wholesale mortgage rate without paying hidden markup or junk fees by checking out my free Underground Mortgage Refinancing Videos.
Here’s a quick video to get you started today by exposing the truth about your broker’s dirty little secret that’s costing your neighbors thousands of dollars.
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.
