My Way Lending

If you’re in the process of refinancing your home loan you might be concerned with finding the right lender and interest rate for your new loan. Finding the lowest mortgage rate will save will save you thousands of dollars over the lifetime of your loan. What many homeowners don’t know about mortgage refinancing is that it is possible to get wholesale rates if you understand how the mortgage game works.

Mortgage loans are retail products just like the appliances you purchase for your home. Appliance stores mark up their products to make a profit. Similarly banks, mortgage companies and mortgage brokers mark up their loans to boost their profits. What you might not know is that this markup is completely unnecessary because you are already paying a fee for their services. Here’s an example of retail markup of your mortgage interest rate in action.

Suppose you refinance your home for $150,000 and your mortgage broker quotes you a 6.5% interest rate. You agree to pay $1,500 for origination fees; this amount is one percent of the loan and is a reasonable amount to pay. What your mortgage broker isn’t telling you is that you qualified for a 6.0% mortgage rate and they’ve marked your rate up for a commission. For every quarter percent you agree to overpay beyond the 6.0% rate the lender approved you the broker receives one percent of your loan amount as commission. In this case you’re paying $1,500 for the origination and the lender is paying $3,000 to the broker for charging you the above market interest rate.

In this example your mortgage broker walks way with $4,500 and you get stuck paying above market rates for the entire duration of your loan. So what about “Beating the Mortgage Game?” The good news for you is that homeowners who learn to recognize this unnecessary markup of their mortgage interest rate can avoid paying it. You can learn more about refinancing your mortgage without overpaying with our free mortgage refinancing toolkit.

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If you’re considering refinancing your home mortgage you may have heard of the “two percent rule.” This rule states you should never refinance your mortgage unless the interest rate of the new loan is at least two percent lower than the mortgage rate on your existing loan. Is the two percent rule good advice?

The two percent rule of mortgage refinancing is actually terrible advice. Instead of looking for a mortgage rate that is two percent lower it is better to evaluate your refinancing options on a “cost per savings” basis.

What is cost per savings? Simply put, you are evaluating how long it will take to recoup your expenses from refinancing with a lower monthly payment amount. This assumes you are refinancing for a lower payment; however, there are several good reasons for refinancing with a higher payment. Higher monthly payments are a topic for another article.

Suppose you are refinancing your home and your total closing costs including origination fees are $4,000. The new mortgage payment is $150 lower. To determine how long it will take you to recoup your expenses from refinancing divide your costs ($4,000) by the difference in payment amounts ($150) to determine that it will take you 27 months to recoup your expenses. ($4,000/$150=26.6) This is just over two years before you will realize any savings from the new mortgage.

Whether or not you’re okay waiting two years to get your money back from refinancing depends on your situation; however, it’s not uncommon to wait five years or even longer to recoup your expenses. One factor to consider when making this decision is how long you plan on keeping your home. If you refinance or sell before paying back your expenses you will lose money by refinancing. You can learn more about your mortgage refinancing options, including expensive pitfalls to avoid with our free mortgage toolkit.

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If you’re a homeowner considering a new mortgage, learning about Yield Spread Premium is well worth your time. If you unknowingly accept a loan that includes Yield Spread Premium you could overpay thousands of dollars every year you keep the loan.

What is Yield Spread Premium?

Simply put, it is interest rate markup by the person arranging your loan so that you lock and close with an above market mortgage rate. Mortgage originators do this because lenders reward them for closing loans at higher than market interest rates. In fact, lenders pay 1.0% of the loan amount for every .25% you agree to overpay. The difference between the mortgage rate you could have and the above market rate you pay is Yield Spread Premium.

Yield Spread Premium in Action

Suppose you refinance your home with a $200,000 loan at 6.75%. Your mortgage broker charges you 1% of your loan amount for the origination which is a reasonable amount to pay. What the broker isn’t telling you is that the wholesale lender approved you for a 6.0% and they’ve marked it up for a commission. In this example your mortgage broker pockets the $2,000 loan origination fee you pay plus $6,000 from the lender for overcharging you. You get stuck paying an above market mortgage rate and your broker walks away with $8,000.

You Can Avoid Yield Spread Premium

Fortunately, homeowners who understand how Yield Spread Premium works can avoid paying it. When shopping for a loan offer tell your potential brokers that you understand Yield Spread Premium and will not tolerate lender paid compensation with your loan. Ask to see the rate sheet from your wholesale lender and compare it to the interest rate guarantee you receive from the broker. You can also find Yield Spread Premium disclosed on your HUD-1 statement. This markup is usually listed on lines 810-812. You’ll often see it listed as “Yield Spread Premium paid by lender” or called YSP or POC. (POC stands for “Paid Outside Closing”)

You can learn more about refinancing your mortgage while avoiding unnecessary markup of your mortgage interest rate with our free mortgage toolkit.

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