If you’ve decided to refinance your mortgage you might not know where to get started. Choosing the best lender for your home loan is important; however, finding a mortgage rate that does not include commission based markup will save you money…and more than you think. Here are the basics you need to know about low mortgage rate refinance loans.
What is Commission Based Markup?
Mortgage loans are like retail products. With the exception of banks, mortgage companies and brokers resell loans for wholesale lenders. You might think that if you call up a wholesale lender yourself you’ll bypass the middleman and save money. Unfortunately this isn’t the case…every wholesale lender has a retail division that deals with public and includes the same markup we’re trying to avoid. So what is this markup? The technical term is called Yield Spread Premium and is the mortgage industry’s dirty laundry.
Yield Spread Premium is a fee paid to your mortgage broker for locking and closing loans with higher than market interest rates. Lenders reward mortgage companies and brokers for overcharging people because these loans with above market rates bring them a hefty profit when the loans are sold to investors. How does it work? It’s actually very simple…for every .25% that your mortgage broker overcharges you’re the lender pays a commission for 1% of your loan amount. Think a quarter of a point is no big deal? Guess again…here’s an example to show you how much Yield Spread Premium is already costing you on your existing mortgage.
Suppose you purchase your home for $280,000 at 6.75%. The broker charges you a one percent origination fee for brokering the loan. What your mortgage broker doesn’t tell you is that you actually qualified for a 6% mortgage rate…they marked up your rate for the additional commission. When you closed on your home the broker’s fee was $2,800. Your broker pocketed an additional $8,400 from the lender for lying and overcharging you.
Yield Spread Premium & Your Mortgage Payment
A quarter of a point might not seem like much…even in this example what’s .75% between friends? More than you think actually. Supposing that you financed your home for 30 years with a fixed rate loan your payment at 6.75% would be $1,816 per month. What if you got the 6.0% rate that the lender approved you?
That’s a whopping $1,656 you overpay every year that you keep this loan! As you can see Yield Spread Premium is not only something you should worry about when refinancing but should be your entire focus when refinancing. It is possible to refinance your home loan paying a flat one percent origination fee without garbage fees or Yield Spread Premium. You can learn more about doing this for yourself by registering for my free mortgage video tutorial.
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.
