If you are considering mortgage refinancing for any reason this year, there are several things you need to know in order to avoid overpaying for your next home loan.
Lender junk fees and mortgage broker markup of your mortgage rate can quickly turn a sweet deal into a costly lemon of a home loan.
Mortgage refinancing with your bank or credit union won’t save you from mortgage broker markup like you might think. Here are several tips to help you avoid paying too much and getting burned with your next mortgage loan.
Banks vs. Mortgage Brokers
Many people think they can avoid paying mortgage broker fees by refinancing their home loan with a bank. After all, your bank is a direct lender right? Unfortunately banks are just as guilty, if not more so of taking advantage of and overcharging their customers as mortgage brokers. In fact, the Banking Lobby in the United States spent millions of dollars having the disclosure laws changed to exclude banks. That’s right; your bank is exempt from the Real Estate Settlement Procedures Act and is not obligated to disclose their profit margin or markup on your home loan.
Mortgage brokers on the other hand have access to wholesale rates and if you find the right broker willing to work for a flat origination fee, you can save yourself thousands of dollars per year. Much like your bank, mortgage brokers can mark up your mortgage rate for a commission from the lender. This commission is known as Yield Spread Premium and if you want the best deal when refinancing your home you’ll need to avoid this unnecessary markup.
What You Need to Know About Mortgage Rates
Most of the mortgage rate quotes you find online include some amount of Yield Spread Premium. Never heard of this markup? Don’t worry, most homeowners haven’t and according to the Secretary of Housing and Urban Development will overpay nearly sixteen billion dollars this year alone because of it. So what is Yield Spread Premium? It is simply a percentage of your loan amount created for the mortgage broker for locking and closing your home loan with a higher than necessary mortgage rate. Lenders reward mortgage brokers for closing loans with higher than market rates because these loans bring them a premium profit when your loan is sold on the secondary market.
For every .25% that your mortgage broker marks up your mortgage rate the lender pays them a commission of one percent of your loan amount. This is paid in addition to any loan origination fees that you’re already paying, and probably paying too much more. It is possible to refinance your mortgage paying a flat origination fee of one percent without markup of your mortgage rate. This is a deal that you’ll never get from your bank or credit union and will save you thousands of dollars every year you keep the loan.
How to Refinance Your Mortgage
The first thing you’ll need to do is find the right mortgage broker for the job. Your friend’s cousin probably isn’t going to be the right broker nor will the ones with full page ads in the phone book, company hummers, and posh office spaces. These mortgage brokers employ expensive sales staff and offices spaces and are going to be much less likely or unable to negotiate the kind of deal you’re looking for when mortgage refinancing. Someone has to make the hummer payment for them right? Just make sure it’s not you.
The best mortgage broker for the job has at least 10 years of experience, is self-employed, and if you can find one working out of their home, even better. These brokers don’t have the expensive overhead and will be more receptive to negotiate with you, especially since you’ll know how to talk to them after watching my Underground Mortgage Videos. Remember, your goal is to avoid Yield Spread Premium when refinancing and to do that you have to find the right person for the job.
Why Yield Spread Premium Is Such a Problem
Here’s an example to illustrate how this commission based markup by the mortgage broker drives up your monthly payment unnecessarily. Suppose you are refinancing your home for $275,000 and your mortgage broker quotes you an interest rate of 5.75%. You agree to pay a loan origination fee of 2.5% and think you’re getting a great deal with your now much lower mortgage payment.
What your mortgage broker didn’t tell you is that the lender approved you for a mortgage rate of 5.0%, but they’ve marked it up to get 3% cash back from the lender as commission. This is in addition to the 2.5% you’ve overpaid for the loan origination fee. In this example your mortgage broker is stuffing their pockets with $15,125 at your expense. You get stuck with a higher than necessary mortgage payment, in addition to shelling out too much cash for your home loan.
With the inflated mortgage rate at 5.75% your monthly payment of a $275,000, 30 year, fixed-rate mortgage loan will be $1600. If you had the mortgage rate you deserve at 5.0% your monthly payment would only be $1,475 per month! That’s a savings of $1500 per year! Remember, you don’t have to be a financial guru to get the kind of deal I’m describing here; you just need to know how to find and negotiate with the right mortgage broker.
You can learn more about mortgage refinancing without paying mortgage broker markup or lender junk fees by registering for my Underground Mortgage Videos. The mortgage videos are free and you can watch them today without downloading anything to your PC.
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.
