Very few homeowners understand how mortgage brokers are compensated for their work. As a result, nearly everyone overpays in one form or another…mortgage brokers are very similar to used car salesman. Pressure sales tactics and improper disclosure of fees and markup are common tactics employed by mortgage brokers…so much that the Secretary of Housing and Urban development was quoted saying that homeowners in the United States will overpay nearly sixteen billion dollars this year because of this abuse. Here are several tips to help you avoid being taken advantage of by understanding how mortgage brokers are compensated.
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Mortgage Loan Origination Fees
The first method of mortgage broker compensation that we’ll discuss today are loan origination fees. Origination fees are commonly referred to as “Origination Points.” Remember that a “point” is one percent of your mortgage amount due at closing. Origination points are different from the discount points you pay to your lender in exchange for a lower rate because this fee goes directly into your mortgage broker’s pocket.
What is a reasonable origination fee? Many homeowners are shocked to find origination fees as high as three and four percent on their Good Faith Estimate…and rightly so. A reasonable fee to pay your mortgage broker for their part in arranging your loan, regardless of a new home purchase or refinancing your existing mortgage is one percent of your loan amount. (Not a penny more)
Beware Mortgage Junk Fees
Application fees, processing fees, broker courier fees, rate lock fees are utter garbage that you should simply refuse to pay. Take the “rate lock fee” for example. Wholesale lenders never charge the broker a fee for locking in a mortgage rate.
The fact that many brokers invent rate lock fees is ludicrous…the same thing goes for the “loan processing fee.” Many brokers claim that they use “professional loan processors” to prepare your folder for the underwriter and charge as much as $500 for the service.
If I was paid $500 an hour for printing out loan documents prepared by computer and Fedexing your file to the underwriter we wouldn’t be having this discussion today. When reviewing the Good Faith Estimate with your mortgage broker tell them that if they want your business they need to drop the junk fees and give you a fair deal.
Yield Spread Premium
The ultimate sleazy trick employed by mortgage brokers today is including Yield Spread Premium (YSP) in your mortgage interest rate. Yield Spread Premium is the markup that makes mortgage rates “retail.” Your broker qualifies you for a specific interest rate from a wholesale mortgage lender. This person will then markup up that interest rate because the lender pays them a bonus for loans closes with above market interest rates. Think your mortgage broker will tell you that they’ve done this to your mortgage rate? Think again…in fact many brokers become defensive and angry when questioned about Yield Spread Premium.
How does your mortgage broker cover up the fact that they’ve marked up your mortgage interest rate? Most brokers omit this markup from the Good Faith Estimate entirely. After all, it’s just an estimate given in “good faith.” Your broker’s not really breaking the law by leaving it off the Good Faith Estimate; however, they have no choice but to list this markup on the HUD-1 statement. The problem with the HUD-1 statement is that brokers have clever ways of justifying and disguising the markup.
What does Yield Spread Premium look like? If the markup is listed on your Good Faith Estimate it will be found around lines 810-811. You’ll notice that the HUD-1 statement looks very much like a Good Faith Estimate but will a more complete disclosure of fees. If Yield Spread Premium is present you will see it listed as YSP, Yield Spread Premium paid to broker, or some variation of Lender Paid Fees. Your mortgage broker may tell you not to worry about this fee because it’s being paid by the lender…as long as it’s not coming out of your pocket what do you care, right?
Wrong! The reason you should care and get downright angry about Yield Spread Premium is because of the reason your lender is paying the fee. Lenders pay one point (remember a point is one percent of your mortgage) for every .25% your mortgage broker overcharges you. This is in addition to the point that you’re already paying for loan origination. Because of this markup you get stuck paying hundreds of dollars in unnecessary mortgage interest and your broker walks away with double, often triple the compensation for their work.
Now the question you’re asking becomes “How Can I Avoid Paying This Ridiculous Markup of My Mortgage Interest Rate?” The answer is simple: Homeowners who learn how to recognize this unnecessary markup of their mortgage interest rate can negotiate with potential mortgage brokers to avoid paying the markup.
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