The mortgage industry has a dirty little secret that according to the Secretary of Housing and Urban Development will cost homeowners in the United States sixteen billion dollars this year alone. If you haven’t learned how to avoid this dirty mortgage secret you’re already paying too much. Here are several tips to help you avoid overpaying for your next mortgage loan.
Yield Spread Premium
The dirty secrets revealed today pertain to Yield Spread Premium (YSP). Most people have never heard of YSP and do not understand how their mortgage broker is compensated for arranging their mortgage.
Why is Yield Spread Premium a dirty mortgage secret? The majority of the time you will never know that the broker is marking up your mortgage rate. This markup is frequently charged on top of the origination fee you’re already paying for the broker’s work. Here’s an example to illustrate Yield Spread Premium in a typical refinancing transaction.
Suppose you are refinancing your home loan for $325,000 and the broker quotes you a mortgage rate of 6.75%, charging you 2% for the origination fee. If you agree to this fee you’ll pay $6,500 at closing for the broker’s part in arranging your loan. A reasonable fee to pay for loan origination is 1% of the loan amount…you’re already overpaying and we haven’t even gotten to the sneaky part.
Dirty Mortgage Secrets Revealed
What your mortgage broker isn’t telling you is that you qualified for a 6% mortgage rate and they’ve marked it up to create Yield Spread Premium. This percentage of your loan amount goes right in the mortgage broker’s pocket at your expense. For every .25% that the mortgage broker marked up your rate they receive 1% of your loan amount. In this example the broker is paid an extra 3% for overcharging you. In addition to the $6,500 you’re overpaying for the broker’s work the lender is paying $9,750 for charging you an above market interest rate.
What does this higher than market mortgage rate mean for you? Paying 6.75% interest on a $325,000 mortgage means your monthly payment will be $2,100 per month. Had you refinanced with the mortgage rate you deserved your payment would have been $1,940 per month. That’s $1,920 out of your pocket every year that you’re paying unnecessarily! There is good news for you today…you can avoid this unnecessary markup of your mortgage rate. You can learn more about refinancing your mortgage without overpaying by registering for my free video tutorial: mortgage secrets revealed.
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.
