Many homeowners have never heard of Yield Spread Premium and do not understand why their mortgage rate is marked up. Yield Spread Premium sounds complicated; however, once you understand why it’s there, you can avoid paying this unnecessary markup. Cutting the fat from your mortgage rate by as little as a quarter point can lower your monthly payment by hundreds of dollars in many cases. Here are the basics you need to understand about Yield Spread Premium and mortgage interest rates.
Why Yield Spread Premium?
From the lender’s point of view this markup is all about return on investment. Wholesale lenders make the majority of their profits selling mortgage loans to investors on the secondary market. Mortgages with above market interest rates bring these lenders premium profits; this is why lenders incentivize overcharging homeowners with retail mortgage rates.
There’s a lot that goes on behind the scenes when your mortgage broker quotes you an interest rate. Once your broker understands your financial situation they’re sizing you up much like a used car salesman does when you walk onto the lot. Your mortgage broker knows the wholesale mortgage rate you qualify from the wholesale lender; however, the broker wants to up sell you on a higher mortgage rate because of this incentive from the wholesale lender. Here’s an example to illustrate how Yield Spread Premium works.
Suppose you are refinancing your 1st and 2nd mortgage loan for a total of $250,000. You wanted to consolidate these two mortgages with a lower interest rate and one payment. The broker tells you that you qualify for a 6.75% fixed rate loan and charges you 1.5 points for the origination fee. One point in this example is $2,500 as a point equals one percent of your loan amount. What your mortgage broker isn’t telling you is that you actually qualified for a 6.0% mortgage rate and they’ve marked it up for a commission from the lender.
In this example the mortgage broker receives $3,750 from you in origination fees. This is compensation for their work in arranging your mortgage; however, a reasonable amount to pay is no more than one percent. In this example 1.5 percent is too much. In addition to overcharging you for origination fees, the mortgage broker receives a commission from the lender for inflating your interest rate. In this example the broker pockets an additional 3.0%, or $7,500 for overcharging you. This fee is Yield Spread Premium. The broker walks away with $11,250 at your expense for little more than a few hours work.
Yield Spread Premium is Dishonest
The overwhelming majority of mortgage brokers will never admit what they’re doing with your mortgage rate. Those that do often become defensive and even angry about any questioning regarding this fee; they will tell you “since the fee isn’t coming out of your pocket don’t worry about it.” The fact of the matter is this fee is advantageous and dishonest. A bill is currently making its way through the House of Representatives making Yield Spread Premium illegal. If this happens how will your mortgage broker afford their boat payments? Too bad for them.
Until Yield Spread Premium is illegal, savvy homeowners who learn to recognize this unnecessary markup can avoid paying it when refinancing. By avoiding Yield Spread Premium you’ll be able to refinance with wholesale mortgage rates, potentially lowering your monthly payment amount by hundreds of dollars. Refinancing with a wholesale mortgage rate isn’t as difficult as you think. You’ll need to find a mortgage broker willing to work for the origination fee alone, without receiving the kickback from the wholesale lender. Honest mortgage brokers do exist; however they can be difficult to find.
How to Find an Honest Mortgage Broker
Your best bet in finding an honest person to originate your mortgage is to look for a local, self-employed broker. A representative a large brokerage house may not have the authority to refinance your mortgage without Yield Spread Premium; in this case mom and pop shops can be the best way to go. Start by contacting local mortgage brokers in your phone book and telling them that you are looking for a mortgage without Yield Spread Premium. Explain that you understand how the markup works and are willing to pay a reasonable origination fee for their work; however, you will not accept a higher mortgage rate for any lender paid compensation. Once you find a mortgage broker willing to work for an origination fee alone you are well on your way to saving thousands of dollars on your next mortgage.