What is a Mortgage Broker?

The right mortgage broker arranging your home loan can save you thousands of dollars from unnecessary points and junk fees. The wrong mortgage broker could turn your home loan into a train wreck that could take years to recover. What is a mortgage broker? Someone you should approach with a healthy dose of suspicion. Here are several tips to help you find the right person to arrange your next home loan.

Mortgage Brokers Are Salespeople

Brokers originate home loans for lenders, receiving a commission for their work. The mortgage broker’s job is to connect you with the best lender for your situation, be it purchase or refinancing. The problem is many mortgage brokers have earned a bad reputation as sleazy sales types out to earn a commission at your expense.

Ideally your mortgage broker serves as an impartial intermediary between you and the bank:

You < –> Your Mortgage Broker < — > The Bank or Lender

Mortgage brokers can be described as selling you retail home loan products from wholesale lenders and banks.

Mortgage Brokers Work For You

Many homeowners skip the middleman by going to their bank or a so-called direct lender. This strategy eliminates the mortgage broker in name only as you still pay a loan origination fee. Skipping the mortgage broker won’t get you wholesale purchase or refinance rates either. There is no cutting out the middleman when it comes to mortgage loans. You’ll pay one way or another.

Since you’re going to be paying for loan origination anyway why not find the best mortgage broker to arrange your home loan? The right person works for you gathering important documentation about your home, income, employment and credit making sure you sail through underwriting without a hiccup. The mortgage broker can also place you with the lowest cost mortgage solution for your situation, educating you along the way.

How Do Mortgage Brokers Get Paid?

Your mortgage broker gets paid form one of two sources. They can charge you a loan origination fee which you’ll pay out-of-pocket at closing, OR they can accept lender paid compensation in the form of Yield Spread Premium. Many homeowners incorrectly think that the government outlawed Yield Spread Premium; however, the government only prohibited charging you for loan origination and accepting Yield Spread Premium from the lender.

So what’s Yield Spread Premium? Simply put, it is cash paid by the lender for the broker marking up your mortgage interest rate. This cash can be used to pay your origination fee and closing costs depending on how much markup you’re willing to accept. Yield Spread Premium is what pays for those “No Fee” refinance offers you see lenders advertising.

Use Your Mortgage Broker to Rate Shop

The main advantage of using a broker to arrange your home purchase or mortgage refinancing is the ability to leverage their contacts and experience to get you the lowest mortgage rates. Brokers can weed through lender junk fees and unnecessary discount points to get you the best deal. The problem is there are mortgage brokers out there that abuse their position by overcharging their origination fee.

Bad mortgage brokers are easy to spot. If yours is too busy selling home loans to process their own paperwork and charges you for a third-party loan processor you should consider taking your business elsewhere. You want a mortgage broker that’s going to give your home loan the attention it deserves without overcharging you.

It’s a good idea to shop around from several brokers before choosing one to arrange your home loan. Different mortgage brokers will have different connections with lenders that others won’t. Be sure and ask what lenders a broker works with before choosing one.

How Much Should You Pay Your Mortgage Broker

If you’re paying the origination fee yourself and not taking higher mortgage rates for Yield Spread Premium a reasonable amount is one percent of your home loan amount. Keep in mind that loan origination fees are negotiable and vary from one mortgage broker to the next. Don’t be afraid to haggle with the person arranging your home loan to get the best deal. Remember the less you pay closing on your new home loan the more benefit you’ll get from today’s low rates, especially when refinancing.

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You can learn more about finding the best person to arrange your next home loan while avoiding unnecessary points and fees by checking out my free Underground Mortgage Videos.

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Buying Down Your Interest Rate

Did you know there’s a way to buy down your interest rate on your home mortgage? It doesn’t matter if you’re purchasing or mortgage refinancing, if you’ve got the cash buying down your interest rate is an option. The question becomes should you consider buying down your interest rate? After all, the more cash you’re paying out-of-pocket, the less benefit you’re getting from today’s low rates. Here’s what you need to know to make an informed decision for your next home loan without leaving cash on the table.

Buying Down Your Interest Rate With Points

Many homeowners have a singular thought when it comes to their home loan…get the lowest interest rates possible, often at the expense of fees. This refinancing strategy isn’t necessarily a mistake, if you plan on keeping your home and never refinancing.

You can buy down your interest rate when refinancing by asking your loan originator for different interest rates and points. Most lenders quote various rates including points by default; however, working with a good broker can often help you get a better deal.

What are points? Discount points are simply a fee you pay the lender for buying down your interest rate. One point is one percent of your home loan amount and reduces your rates by .25% in the form of prepaid interest.

Most lenders quote refinance rates that include points automatically; however, zero or no point mortgages are a popular option. You might be asking yourself since mortgage rates are near sixty-year lows does it make sense to pay discount points?

Should You Buy Down Your Mortgage Rates?

Choosing the best option for your next home loan can be tricky, especially when it comes to taking cash out of your pocket. If your broker will give you a copy of the lenders rate sheet it might help you make an informed decision based on that lender’s par rate.

Par Mortgage Rate Definition: Interest rates that do not include markup for the broker’s commission or discount points

Suppose you’re considering NFCU Mortgage Rates and the par rate is 4.75 percent but you’re after 4.5 percent. Paying one discount point at closing has the effect of buying down your interest rate to 4.5 percent.

Your Mortgage Broker’s refinance rate sheet looks something like this:

Mortgage Rate vs. Price (Discount Points)

  • 5.375% – (0.375) Yield Spread Premium
  • 5.25% – 0.00 Zero Point Option
  • 5.125% – 0.25 discount points
  • 5.00% – 0.50 discount points
  • 4.875% – 1.00 discount points
  • 5.75% – 1.75 discount points

Each mortgage rate quoted has a price paid at closing in the form of points. In this example the par rate is 5.25 percent and the highest rate at 5.375 includes Yield Spread Premium. Higher discount point options have lower interest rates but higher costs. The more you want to buy down your interest rate the more it’s going to cost you at closing.

One common mortgage mistake when refinancing is to go after the lowest possible interest rate at the expense of fees. While it’s true that paying discount points will get you lower refinance rates and a lower payment it makes recouping your out-of-pocket expenses more difficult.

Here’s an example to illustrate how discount points lowers your monthly payment on a $250,000 mortgage:

  • Refinancing with a par mortgage rate of 4.5% gets you a payment of $1,113 per month.
  • Refinancing with one discount point gets you 4.25% and a payment of $983 per month.
  • Cost for buying down your mortgage rate: $2500
  • Monthly payment savings: $130

Is it worth paying discount points for buying down your interest rate? The more you pay out-of-pocket at closing the less benefit you’re getting from today’s low refinance rates AND the longer it’s going to take to break even recouping your expenses. In this case it’s going to take you 20 months just to break even on the points, even longer for your closing costs.

If you’re not able to break even recouping your closing costs before you sell or another mortgage refinance you’re wasting your money buying down your interest rate. You should note that approximating your break-even point by dividing your cost by the monthly savings is only valid if you keep the same term length or shorten your mortgage’s term. If you lengthen your term length by going from a 15-year to a 30 or even a 40-year mortgage it’s going to be impossible to break even given the finance costs of those extra years.

Does buying down your interest rate make sense in today’s market? You can do the math for yourself; however, given that the average homeowner refinances every four or five years discount points are a waste of money for most homeowners.

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You can learn more about getting the best deal on your next home loan without paying lender junk fees by checking out my free Underground Mortgage videos.

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40 Year Mortgage Rates

If you’re considering refinancing you might be tempted by the payment that comes with 40 year mortgage rates. Spreading your home loan payments out over 40 years instead of 30 will get you lower payments; however, is it worth paying the lender for an extra ten years of interest? Here are the pros and cons of 40 year mortgage rates to help you make an informed decision for your next home loan.

40 Year Mortgage Rates

Are there any advantages to choosing 40 year mortgage rates for your next home loan?

Many lenders are offering longer term lengths as an alternative to the traditional 30-year mortgage. Are these home loans a good idea or is choosing too long of a term length a mistake?

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40 Year Mortgage Rates Review

The majority of homeowners in the United States choose 30 year mortgage rates without giving a second thought. That includes adjustable rate mortgages like the popular 5/1 and 7/1 hybrid ARMs. You might be asking yourself “why would anyone drag out their home loan for 40 years?” By choosing 40 year mortgage rates for your next home loan your amortization schedule is based on 40 years instead of 30 resulting in lower payments.

Here’s an example to illustrate how lengthening the term gets you a lower payment amount:

Suppose you’re refinancing your home for $300,000. Based on your financial details you qualify for 30 year mortgage rates at 3.9 percent which gets you a payment of $1,410 per month. If you were to choose 40 year mortgage rates you’d qualify for 4.3 percent and a monthly payment of $1,300.

That’s a (perceived) savings of $110 per month. It’s worth noting that interest rates of this type are slightly higher than traditional 30 year refinance rates. Longer term lengths pose higher risk for lenders and therefor come with higher interest rates. Some borrowers might find they qualify for this type of home loan and not 30 year based on their debt-to-income ratio.

Disadvantages of 40 Year Mortgage Rates

Having a lower payment is all fine and dandy but what’s the down side of choosing this type of home loan? Your monthly payment might be lower ($110 per month in our example), the amount of interest you’re paying over the duration of your home loan is astronomical.

Another downside is that because your amortization schedule is spread out over 40 years instead of 30, you’re building equity in your home at a much slower rate. In an economy that’s seeing declining home values you could find yourself underwater. (Meaning you owe more than your home is worth which could make it very difficult to refinance later.)

Should you choose 40 year mortgage rates for your next home loan? I would recommend this type of loan only as a last resort if no other options are available for you. If you’re considering mortgage refinancing with 40 year mortgage rates you’ll never recoup your out-of-pocket expenses paid at closing making this type of home loan a losing proposition from day one.

You can learn more about avoiding common mortgage mistakes and getting the best deal on your next home loan by checking out my free Underground Mortgage Videos.

Fixed Rate Mortgage vs. Adjustable Rate Mortgage Loans

If you’re considering buying a new home or mortgage refinancing but aren’t sure which kind of loan is right for you you’re not alone. Both types of mortgage loans have advantages and disadvantages depending on your financial needs and comfort level with risk. Here are the pros and cons of fixed rate mortgage loans versus adjustable rate mortgage loans to help you make an informed decision.

Fixed Rate Mortgage Pros & Cons

Fixed rate mortgage loans are fairly self-explanatory in that your interest rate and payment amount will not change for the entire duration of your home loan. Most homeowners choose fixed rate mortgage loans for the stability of knowing what the payment will be month in and month out. That being said, fixed rate mortgages, especially those with 30-year term lengths have higher interest rates than similar adjustable rate mortgage loans.

When Should You Choose a Fixed Rate Mortgage?

Fixed rate mortgage loans are right for you if you plan on keeping your home for a long time, don’t like financial risk and are living on a tight budget.

If higher interest rates are putting you off choosing a fixed rate mortgage despite the advantages, consider shortening the term-length of your new home loan. Most people choose a 30-year term length without giving a second thought; however, choosing a 10 or 15-year mortgage will get you a lower interest rate and save you a bundle in financing.

Adjustable Rate Mortgage Pros & Cons

Adjustable Rate Mortgage (ARM) loans are intimidating for many homeowners. If you’re not familiar with how Adjustable Rate Mortgage loans work, the home loan is fixed for an initial period of time and then the interest rate and payment changes at a regular intervals. These home loans commonly get their interest rates from the LIBOR index, which is the London Interbank Offered Rate, a European index.

Adjustable Rate Mortgage loans are designated by their fixed period and time frame for reset. Common designations include 5/1, 7/1 and 10/1. The 5/1 Adjustable Rate Mortgage is fixed for the first five years and will reset every year after on the anniversary date.

The advantage of Adjustable Rate Mortgages is that interest rates can be much lower than similar fixed rate mortgage loans. Because ARMs are fixed for the initial period they are a popular choice for real-estate investors because of the lower payment amount. There are risks with Adjustable Rate Mortgage loans, mainly that if interest rates go up when your loan resets, your payment will also go up.

If your Adjustable Rate Mortgage is tied to the LIBOR index as many are, there is more risk because your home loan payment can be influenced by a struggling European economy.

Adjustable Rate Mortgage loans come with built-in safety features known as caps. Most ARMs have an annual cap which limits how much your payment can go up in a year as well as a lifetime cap, limiting how much the payment can go up over the mortgage loan’s term.

When Should You Choose an Adjustable Rate Mortgage?

Adjustable Rate Mortgage loans are right for you if you only plan on keeping the home for a short period of time, need the lowest possible payment and can tolerate financial risk.

Adjustable Rate Mortgages like the 5/1 ARM are a popular choice for real-estate investors flipping properties in a short amount of time. There’s a catch if you’re planning or refinancing or selling your home in the near future. Make sure your Adjustable Rate Mortgage does not have a prepayment penalty. Choosing a home loan with a penalty for early repayment will negate any savings you get from choosing an Adjustable Rate Mortgage for short-term financing.

Community based credit unions are a good place to start shopping for Adjustable Rate Mortgage loans that do not include prepayment penalties.

As you can see there are a number of advantages and disadvantages for both types of home loans. One last tip when choosing a fixed rate mortgage versus an adjustable rate mortgage loan: pay close attention to the fees you pay at closing.

Your closing costs make or break the deal you’re getting regardless of the type or how low your interest rate. Overpaying the origination fee or paying unnecessary discount points robs you of the benefit you’re getting from today’s low purchase and mortgage refinance rates from top lenders like Amerisave and Navy Federal Credit Union.

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You can learn more about getting the best deal for your next home loan by avoiding lender junk fees and markup by checking out my free Underground Mortgage Videos.

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Here’s a quick sample to get you started choosing the best mortgage lender for your next home loan…

The “Should I Refinance” Rule of Thumb

If you’re considering mortgage refinancing you may have heard of the two percent rule of thumb. This mortgage refinance rule states you should only take out a new home loan if the interest rate is two percent lower than your existing rate. Is this the best approach for answering the question should I refinance my mortgage or are you leaving cash on the table? Here’s a better way to base your mortgage refinancing decision and help you avoid paying too much in the process.

The Should I Refinance Rule of Thumb

Refinance rates are hovering near four percent, the lowest levels in sixty years. If you’re currently paying six percent or more on your home loan then the two percent rule applies to you but what about everyone else? If you’re paying 5%, even 4.5% you can still benefit from mortgage refinancing. Answering the question “Should I Refinance” based on a two percent drop in your interest rate is walking away from a lot of money.

Here’s how to make an informed decision if mortgage refinancing is right for you without leaving cash on the table.

This example illustrates the problem with the “two percent rule.”

  • Mortgage Loan Amount: $400.000
  • Term Length & Rate: 30-year fixed-rate @ 5%
  • Refinance Mortgage Rate: 4.25%
  • Refinance Closing Costs: $4,000

In this example the monthly payment at 5% is $2,147. Refinancing with today’s best mortgage lenders could get you an interest rate as low as 4.25% which lowers your payment to $1,967. This is a savings of $180 per month BUT mortgage refinancing will cost you four grand. Is it worthwhile?

Debunking The Two Percent Rule

In this example it’s going to take about 23 months to break-even recouping your out-of-pocket expenses. (divide $4,000 by the $180 you’re saving each month)

This is a reasonable amount of time to recoup your closing costs so if you’re answering the question should I refinance in this way it makes sense. In this example we were refinancing a large home loan, $4,000. If you’re refinancing a lesser amount you’ll still want to run the numbers before answering the question should I refinance because the amount you’ll be saving each month will be less and it will take longer to break even.

If you decide to sell your home or refinance again before recouping your closing costs you’re going to lose money no matter how low interest rates fall.

How to Avoid Unnecessary Points & Junk Fees

As you can see your closing costs decide how long it’s going to take to break even recouping closing costs and therefore how good of a deal you’re getting. One strategy for getting the most benefit from mortgage refinancing is to pay as little as possible at closing. Sure there are no free refinance options; however, you’re giving up low refinance rates in exchange for having your closing costs paid.

The best way to maximize your benefit from low refinance mortgage rates is to avoid paying discount points and lender junk fees. Discount points serve to lower your interest rate. Why pay a fee when rates are at the lowest levels in sixty years and discount points only push your break-even point further away?

Lender junk fees like application and processing fees or overpaying the origination fee do the same thing. You shouldn’t be paying more than one percent for the loan origination fee and I’ve even seen some small credit unions charge as little as .28 percent. Shopping for both refinance rates and fees will make sure you’re breaking even in the least amount of time and maximizing your benefit from the new home loan.

Shorten Your Term Length Whenever Possible

Once you’ve answered the question Should I Refinance, another strategy for saving money is to lower your term-length. The term of your home loan is the amount of time you have to repay the mortgage and along with your refinance rates determines your payment amount.

One common mistake is going from a 15-year to a 30 or even 40-year mortgage. If you do this the calculation we’ve been using to find your break-even point is no longer valid. In these cases you’ll never break even and will be losing a boatload of cash because on the interest you’re paying for those extra years.

Shortening your term-length allows you to build equity in your home at an accelerated rate and saves you thousands of dollars per year in finance charges. Government programs like HARP 2.0 encourage shorter term-lengths for this very reason. This is why you should consider a 15-year or even 10-year mortgage if you can afford the higher payments.

If you need help with the math when answering the question should I refinance, leave a comment below and I’ll be more than happy to lend a hand.

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You can learn more about saving thousands of dollars on your next home loan by avoiding junk fees and markup by checking out my free Underground Mortgage Videos.

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Here’s a quick sample to get you started avoiding common mortgage mistakes on your next home loan…