If you are in the process of shopping for a home loan there are a number of Refinance Fees you need to avoid if you don’t want to overpay. Many of these fees are charged by the lender; however, there are several refinance fees that do nothing but line your mortgage broker’s pockets. Here are several tips to help you avoid paying too much for your next mortgage loan.
When refinancing your home mortgage loan you can reasonably expect to pay many of the same fees you paid when purchasing your home. The problem is that you probably didn’t have a good idea which of those fees were necessary and which were pure garbage when you purchased your home. Refinance fees typically come from three sources: the lender, the broker, and third party companies involved with closing your mortgage.
Mortgage Broker Refinance Fees
Honest mortgage brokers explain their fees upfront and will typically only charge you a loan origination fee. This refinance fee will often appear in your loan documents as “origination points” and a reasonable amount to pay for loan origination is one percent of your mortgage amount. Many brokers charge as much as five percent or more; however, you should never agree to pay this much for a mortgage broker’s services.
There are a number of mortgage broker junk fees you’ll want to keep an eye out for when refinancing. At the top of this list is the so called “rate lock fee.” Lenders never charge a fee for locking in your mortgage rate. If your mortgage broker is charging you a fee for locking in your interest rate you’re probably dealing with a dishonest mortgage broker. Another warning flag to watch out for is if your broker verbally locks your mortgage rate or provides you a written lock on company letterhead. Rate lock confirmation should always come from the lender and be confirmed in writing. If you have verbally locked your mortgage rate you haven’t locked anything.
Dishonest mortgage brokers pass of their own rate lock confirmation and tell you the rate lock from the lender is proprietary or confidential and that you cannot see it. They tell you this because they’re hiding a fee they receive from the lender for marking up your mortgage rate…more on this fee later; however, you know you are dealing with a 100% dishonest mortgage broker if they will not show you the rate lock confirmation in writing from the lender. Other junk fees include broker courier fees and processing fees. If you find these on your Good Faith Estimate or HUD-1 statement you’ll want to have a heart-to-heart with your mortgage broker and strongly consider taking your business somewhere else.
Mortgage Lender Refinance Fees
Once your mortgage broker has completed processing your application the loan is transferred to underwriting at your mortgage lender. You can expect to pay underwriting fees at this stage of the game however, most of the lender fees are not junk fees and cannot be avoided. Your mortgage company or broker is responsible for 90% of the junk fees you’ll encounter when refinancing your mortgage loan unless you refinance with a bank or credit union.
Many homeowners think they’ll get the best deal and avoid junk refinance fees by sticking with their bank or credit union. Unfortunately this simply isn’t true…banks and credit unions are exempt from key legislation in the United States known as the Real Estate Settlement Procedures Act that requires mortgage companies and brokers to disclose their profit margins and markup on your loan. This means if you refinance your home loan with a bank or credit union you’ll never know how much they’ve marked up your mortgage loan or how much you’ve overpaid. Never refinance your home mortgage with a bank or credit union.
Hidden Refinance Fees
Now that you know banks and credit unions are a bad idea there is one hidden fee you need to know about before choosing a broker to refinance your home loan. Mortgage brokers receive their compensation for arranging your loan from two sources. We’ve already discussed loan origination fees and you now know that a reasonable fee to pay your broker is one percent of your loan amount, but what about this “hidden” compensation? Did you know that mortgage lenders reward brokers for overcharging you? This reward doesn’t come from overcharging you on refinance fees but by marking up your mortgage interest rate.
Mortgage lenders know that the majority of their profit comes from selling your home loan to investors on the secondary market. What better way to boost their profits by selling your loan with an above market mortgage rate for a premium fee. This is why mortgage lenders reward brokers for marking up your mortgage rate. This markup of your mortgage rate creates a percentage of your loan amount for the Mortgage Company or broker. Known as Yield Spread Premium this fee is a cash bonus paid when you lock and close your mortgage loan with a higher than market mortgage rate.
Yield Spread Premium is usually disguised in your loan documents and rarely talked about by your broker. In fact, many mortgage brokers become angry and defensive when questioned about Yield Spread Premium. This is another warning flag that you’re dealing with a potentially dishonest broker if they refuse to discuss Yield Spread Premium on your loan. How can you spot this unnecessary markup of your mortgage rate? I’ll tell you…
Your first opportunity to recognize and avoid Yield Spread Premium comes not on the Good Faith Estimate but on the rate lock confirmation from your lender. This is why many dishonest mortgage brokers refuse to show you the confirmation claiming that it’s confidential and proprietary. Rubbish! They just don’t want you to see how much they’ve marked up your mortgage rate and the fee your lender is paying them for overcharging you!
Why Yield Spread Premium is Bad
You’ve learned how mortgage brokers make money from arranging your loan and you’ve learned about Yield Spread Premium; however, you might be asking why should I care about a fee paid by the lender? After all it’s not coming out of my pocket right? Wrong! It’s not the fee you should be concerned about but rather the reason your mortgage lender is paying this fee. Remember your mortgage broker receives this fee for marking up your mortgage rate. Your broker is paid one percent of your loan amount for every .25 percent they markup of your interest rate. What does this markup do to your monthly payment amount?
Suppose you’re refinancing your home for $300,000 and the broker quotes you a mortgage rate of 5.5 percent, charging you a loan origination fee of one percent or in this case $3,000. Sounds like a good deal right? What you don’t know is that you actually qualified for a 5.0 percent mortgage rate and the broker marked it up by .5 percent to get a bonus from the lender of $6,000. What does this markup do to your payment? At 5.5 percent on a fixed rate 30 year mortgage your monthly payment will be $1,700 per month. If you had the mortgage rate you deserve at 5.0 percent your monthly payment would be only $1600 per month! That’s $1,200 a year you’re throwing away just to give your mortgage broker an unnecessary bonus for overcharging you!
Happily Yield Spread Premium can be avoided. If you’ve read this far you’re head and shoulders above most homeowners out there who have never heard of Yield Spread Premium. You can learn more about avoiding the unnecessary markup of your mortgage rate and other junk fees by registering for the free mortgage videos on this website.