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Cash out mortgage refinancing is the process of borrowing more than you owe on your existing loan and keeping the difference. For many homeowners cash out refinancing is an affordable alternative to a second mortgage or a home equity line of credit.

Suppose for example you owe $100,000 on a $200,000 mortgage and want $25,000 to make repairs to your home. You could refinance your mortgage for $125,000 and the remaining $25,000 will be paid to you at closing. You can use this money for any reason; many homeowners use the money to make repairs, pay for a child’s education, or even consolidate bills. The advantage of cash out mortgage refinancing is that you will qualify for a lower interest rate because your home is secured by only one loan.

When you borrow against your equity using a second mortgage or home equity line of credit your home is secured by multiple loans which represent a greater risk for the lender. The greater risk you pose, the higher your mortgage rate will be and the more expensive your loan becomes.

Keep in mind that cash out refinancing borrows against your equity by replacing your first mortgage. Home equity lines of credit and second mortgages are an additional loan secured by your home just like your mortgage. If you fall behind on the payments for your home equity loan you could lose your home just as quickly as if you fell behind on your mortgage payments.

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If you’re in the process of mortgage refinancing, comparison shopping will only get you so far. Most homeowners that focus their energy on comparison shopping simply end up with the best of the worst loan offers they consider. Here are several tips to help you negotiate for a mortgage rate that does not include Yield Spread Premium when refinancing your mortgage.

What is Yield Spread Premium?

Mortgage companies and brokers are (over) compensated for their work in several ways. There are the origination fees (also called origination points) you pay directly to the mortgage company or broker, plus lender paid compensation that is passed on to you in the form of a higher mortgage rate. Many people think that because this compensation is “lender paid,” it can’t be a bad thing right? That’s where Yield Spread Premium comes into the picture.

When you apply for mortgage refinancing with a mortgage company or broker, the lender behind the loan approves you for a specific, wholesale mortgage rate. Your mortgage broker knows this interest rate; however, they mark it up for a commission. For every quarter percent you agree to overpay your mortgage broker is paid one percent of the loan amount by the lender.

Here’s an example. Suppose you are refinancing your home with a $150,000 mortgage at 6.75%. The broker charges you an origination fee of one percent or $1,500. What your mortgage broker isn’t telling you is that you were approved for a 6.25 % interest rate. Because your mortgage broker marked up your rate the wholesale lender paid them 2% of your loan, or $3,000. In this example the broker walked away with $4,500 and you got stuck paying too much mortgage interest.

Can You Avoid Paying Yield Spread Premium?

Homeowners who learn how to negotiate when comparison shopping for a new mortgage can avoid paying this markup. When you contact local mortgage companies and brokers try and deal with the owner of the firm. Tell this person you understand how Yield Spread Premium works and will not pay it when refinancing. Offer to pay a reasonable origination fee for their services; any honest mortgage broker would agree to these terms. You can learn more about refinancing your mortgage while avoiding costly mistakes with our free video tutorial.

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