No one wants to get ripped off when it comes to any purchase, and your mortgage loan is no exception. The problem is that very few homeowners understand how mortgage loans work and wind up overpaying thousands of dollars. Here are several "industry secrets" to help you avoid paying too much when refinancing your home mortgage loan.
The Mortgage Industry Has a Dirty Little Secret
When it comes to ripping people off you can't get dirtier than Yield Spread Premium. If you've never heard of Yield Spread Premium don't worry, 90% of homeowners have no idea it exists. So what is Yield Spread Premium? Simply put this is a commission paid to the person arranging your loan for overcharging you.
It doesn't matter if that person is the mortgage company down the street from you, a broker, or that mega giant Internet web site; with the exception of bank originated mortgages all loans work the same.
Most mortgage companies and brokers charge you an origination fee for their part in arranging your loan. This origination fee, often called "origination points" could set you back as much as three to four percent of your loan amount. One percent is a reasonable amount to pay for loan origination; however most people pay too much for this fee.
Yield Spread Premium Exposed
How does Yield Spread Premium work? Here's an example to illustrate how Yield Spread Premium can drive up your mortgage payment by thousands of dollars every year. Suppose you're refinancing your home loan for $325,000.
Your mortgage broker quotes you an interest rate of 6.75% and charges you an origination fee of 2.5%. You'll be required to pay $8,125 to the mortgage broker for their part in arranging you loan. At this mortgage rate your monthly payment amount will be $2,110.
What Your Mortgage Broker Doesn't Want You To Know
The mortgage broker quoted you an interest rate of 6.75%. What your broker isn't telling you is that you actually qualified for a mortgage rate of 6.0% and they've marked it up to get a commission from the lender.
The lender pays your mortgage broker a bonus of 1.0% of your mortgage amount for every 0.25% you agree to overpay. In this example the broker receives an additional 3.0%, or $9,750 on top of the $8,125 that you're already paying them for loan origination. That's a whopping $17,875 for a few hours work!
So what if the lender pays your mortgage broker all that money, it's not coming out of your pocket right? Wrong! If you had gotten the mortgage rate that you qualified your monthly payment would only be $1,940 per month.
That's $2,040 you're paying every year unnecessarily. The good news for you is that Yield Spread Premium and other junk fees can be avoided. Invest a few hours doing your homework and you can save yourself thousands of dollars every year on your mortgage loan.
By: Louie Latour
Louie Latour specializes in showing homeowners how to avoid costly mortgage mistakes and predatory lenders. To get your hands on this Mortgage Refinancing Toolkit, which teaches strategies for finding the best mortgage and saving thousands of dollars in the process, visit Refiadvisor.com. Get your free mortgage refinancing tutorial today at: refiadvisor.com