Many homeowners don’t know how their mortgage broker is paid for the work they do arranging their home loans.
Your Broker is compensated for their work from two sources; understanding how this compensation works will help you avoid paying too much for your next mortgage loan.
Here are several tips to help you understand how mortgage brokers overcharge people to boost their commissions.
What is Yield Spread Premium?
YSP or Yield Spread Premium is a fee paid by the wholesale lender when your broker locks and closes your mortgage with an above market interest rate. Lenders reward mortgage brokers for overcharging because these loans bring a premium profit when sold to investors. The amount of Yield Spread Premium depends on how much your broker overcharges you. For every .25% you agree to overpay the broker’s “kickback” is 1% of your loan amount.
Suppose you are refinancing your home loan for $250,000. The broker quotes you a rate of 6.75% but doesn’t tell you that you’ve qualified for 6.0%. The spread between what you could have had and what you got is .75% which creates 3% of Yield Spread Premium for the broker. Your broker receives a kickback of $7,500 from the lender for overcharging you…in addition to the origination fee that you’re already paying.
Yield Spread Premium can be hard to spot unless you know what to look for. Many brokers “forget” to list the fee on your Good Faith Estimate. If this is the case the next opportunity you will have to catch it is on the rate lock confirmation from the wholesale lender. Make sure the confirmation you receive after locking your rate comes from the lender and not the broker…many brokers provide rate lock confirmation typed up on their own letterhead. If you get a rate lock confirmation typed up on the broker’s letterhead you do not have proof of anything…let alone guaranteeing your mortgage rate.
Your last opportunity to catch Yield Spread Premium before closing on your new mortgage will be on the HUD-1 statement. The fee is usually listed around lines 810-811; however, you may find it further down. It is often called “mortgage broker rebate” or “YSP paid to broker.” If you find this on your HUD-1 statement you have a mortgage rate that includes commission based markup.
How to Get The Best Mortgage Loan
Many homeowners don’t know what a good mortgage deal when they see one. It is possible to get a wholesale mortgage rate without Yield Spread Premium and pay a one percent origination fee to the broker.
You can learn more about refinancing your home with a wholesale mortgage rate while avoiding junk fees by checking out my free Underground Mortgage Videos.