Ditech : Mortgage Refinancing With a Broker: Costly Mistakes to Avoid When Refinancing With a Mortgage Broker

If you are considering mortgage refinancing with a mortgage broker, there are a number of things you need to know before signing an agreement. Mortgage brokers can be an excellent resource for finding competitive mortgage refinancing offers; however, you need to be careful to avoid overpaying for the mortgage broker’s services. Here are several tips to help you avoid costly mortgage refinancing mistakes when working with a mortgage broker.

Mortgage Refinancing: What Are Mortgage Brokers?

Mortgage brokers are a third party retail outlet for securing mortgage refinancing loans. When mortgage refinancing it is important to understand the how the retail mortgage market works. With the exception of banks and broker-banks (which you should avoid altogether) the retail mortgage market is made up of mortgage companies, online web portals, and mortgage brokers. These retail outlets all work basically the same; mortgage brokers sell mortgages for wholesale mortgage lenders for a commission.

Mortgage Refinancing: How Do Mortgage Brokers Operate?

When you apply for a mortgage loan from a mortgage broker the wholesale lender qualifies you for a certain interest rate and provides the mortgage broker with a written guarantee of that interest rate. The mortgage broker will turn around and reissue the mortgage refinancing interest rate guarantee in their company’s name. Do you think the guarantee you receive is the same as the one that came from the wholesale lender? If you said “No!” give yourself a gold star. Mortgage brokers always mark up the interest rate the wholesale lender qualified you for. The wholesale mortgage refinancing lender may have qualified you for a 6.0% loan; however, the mortgage broker marked it up to 6.75% on your interest rate guarantee.

Mortgage Refinancing: What is Mortgage Broker Yield Spread Premium?

The markup your mortgage broker slips into your interest rate when mortgage refinancing is called Yield Spread Premium. Mortgage brokers are compensated with the origination points or fees you pay for mortgage refinancing. Yield Spread Premium is the icing on the cake for many retail mortgage outlets like mortgage brokers. By overcharging you for the interest rate, the mortgage broker receives an additional point for each .25% they mark up on the loan as a bonus from the wholesale lender. In the case above where the wholesale lender qualified you for a 6% loan and your mortgage broker marked up the interest rate to 6.75%, that broker will receive three additional points as a bonus for ripping you off.

Suppose your mortgage refinancing loan was for $200,000, the mortgage broker would receive a $6,000 bonus for overcharging you. The overwhelming majority of homeowners never know they’ve been ripped off in this manner by the mortgage broker. How can you avoid paying this mortgage broker markup when mortgage refinancing? Homeowners that learn to recognize Yield Spread Premium can avoid paying the markup.