My Way Lending

The majority of confusion homeowners have when refinancing their mortgages comes from closing costs. Many homeowners simply don’t know which closing costs are legitimate and what reasonable third party charges are. When refinancing your mortgage there are basically three ways to pay your closing costs.

The most common and most expensive method for paying your mortgage closing costs is to roll them into your loan balance. This method not only raises your principle balance but the amount you pay for financing charges over the entire duration of your loan. Another common and misleading ploy lenders use are the so called “no fee” mortgage loans. These are popular among lenders like Bank of America who brag about their “no closing cost” or “flat fee” mortgage loans.

The problem with no fee mortgage loans is that are truly no free lunches when it comes to loans. Mortgage lenders never waive their fees, the simply offset them from another source. This offset almost always comes in the form of a higher mortgage rate. Why pay a higher interest rate for the entire duration of your loan when simply paying these costs will save you ten fold over the lifetime of your loan? Think of your closing costs as an investment that will bring you a return in the form of lower finance charges for the entire duration of your mortgage.

When you’re paying closing costs out of your pocket it’s important to make sure the person originating your loan doesn’t markup up your interest rate for their commission. Many brokers allow homeowners to use Yield Spread Premium to pay their closing costs. Yield Spread Premium is the “retail” markup of your interest rate for a commission from the wholesale lender. Rather than pocket this cash a good mortgage broker will let you use it to pay your settlement charges.

Dishonest mortgage brokers keep this money even when the closing costs are coming out of your own pocket, often without telling you. How can you avoid paying Yield Spread Premium when refinancing your mortgage? Homeowners who simply learn to recognize this unnecessary can avoid paying it. You can learn more about refinancing your mortgage without paying too much with our free mortgage toolkit.

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Refinancing your home loan with a mortgage broker can help you find loan offers you wouldn’t find comparison shopping on your own. One big problem with mortgage brokers is that they are paid by commission and the loan that nets them biggest commission is probably the wrong loan for your situation.

Another problem with mortgage brokers are the sneaky and deceptive tricks they use to get their commission. Because you’re already paying a perfectly reasonable origination fee for their services, any additional commission is not only unnecessary, but is simply taking advantage of people. Here are several tips to help you avoid mortgage broker tricks when refinancing your mortgage.

The biggest trick your mortgage broker is likely to pull is what’s known as Yield Spread Premium. This is the unnecessary markup of your mortgage interest rate to get a commission from the lender. Never mind that you’re already paying origination fees; for every .25% the broker inflates your mortgage rate the wholesale lender pays them an additional 1% of your loan amount. Mortgage brokers are required by the Real Estate Settlement Procedures Act to disclose this markup; however, they have clever ways of disguising it on the HUD-1.

Here’s an example of a brokered transaction including Yield Spread Premium. Suppose you are refinancing your mortgage for $315,000. Your mortgage broker tells you they’ve got a great deal for you at 7.0% for 30 years. The broker charges you one percent for the origination fee which is a reasonable $3,150 to pay. What your mortgage broker isn’t telling you is that the wholesale mortgage lender approved you for a 6.5% interest rate and they’ve marked it up because the lender pays them a bonus of $6,300 for overcharging you.

Mortgage lenders pay a bonus for loans with above market interest rates because the lender makes the majority of their profit selling loans to investors on the secondary mortgage market. Loans with above market mortgage rates bring a premium profit for the lender. In the previous example your mortgage broker banked $9,450 and you get stuck paying an above market interest rate.

How Can You Avoid Mortgage Broker Tricks?

You can avoid paying Yield Spread Premium when refinancing by learning how to recognize the markup and negotiating with potential mortgage brokers. Start by telling your broker that you understand how this markup works and will not accept a loan that includes any lender paid compensation. You can learn more mortgage broker tricks to avoid when refinancing with our free mortgage toolkit.

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Refinancing your home loan with a mortgage broker can save you a lot of money if you can find the right broker. Mortgage brokers are often just like used car salesman; their commission is based on how much you overpay when refinancing. Here are several tips to help you negotiate with potential mortgage brokers to avoid overpaying when refinancing your home loan.

The obvious question you might be asking is “What is a reasonable mortgage broker fee?” To answer this question you need to understand how mortgage brokers are compensated for their services. When refinancing your mortgage the broker will charge you an origination fee (also called origination points) which should not be more than one percent of your loan amount. This origination fee is more than suitable compensation for the broker’s services; however, your broker has a knack for lining their pockets at your expense.

The second way mortgage brokers are compensated is by the lender. This “lender paid compensation” is actually an incentive for charging you above market interest rates. When the wholesale lender behind your loan approves your application, you qualify for a specific mortgage rate. The mortgage broker marks up your interest rate because the lender pays them one percent of your loan amount for every quarter percent they overcharge you. This markup is called Yield Spread Premium and homeowners who unknowingly agree to pay it could spend thousands of dollars unnecessarily.

How can you avoid paying Yield Spread Premium when refinancing your home loan with a mortgage broker? Start by negotiating with potential brokers and telling them upfront that you understand Yield Spread Premium and will not tolerate this “lender paid compensation” with your loan. Tell them you will pay a reasonable origination fee for their services, not more than one percent, and any necessary third party settlement charges. Any honest mortgage broker would agree to these terms and once you’ve found one you’ll be on the right track to finding the perfect loan.

You can learn more about refinancing your mortgage while avoiding costly pitfalls with our free mortgage refinancing toolkit.

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