Mortgage brokers routinely exploit their customers by marking up mortgage interest rates like a used car salesman overcharging you for a car. Understanding how retail mortgage loans work can tip the scales in your favor when working with a mortgage broker. Here are several tips to help you outwit your mortgage broker and avoid overpaying for your new mortgage loan.
Mortgage brokers can be an excellent resource for helping you find the best mortgage loan however, you have to watch them like a hawk to avoid overpaying for the new mortgage loan. Mortgage brokers are required to disclose all their fees and retail markup of your mortgage due to the Real Estate Settlement Procedures Act (RESPA) however, they have clever ways of disguising these fees.
When you take out a mortgage loan using a mortgage broker you will pay an origination fee to that person for their services. The origination fee is more than ample compensation for your mortgage broker however, like a used car salesman your mortgage broker tries to take advantage of you by inflating the interest rate. Here?s how this happens. Suppose you apply for a mortgage with George the mortgage broker. George will contact the wholesale lender who will qualify you for a specific interest rate based on the details of your application and prevailing interest rates. The wholesale mortgage lender gives George a written guarantee for that interest rate. We?ll say the wholesale lender guaranteed you a 6.0% mortgage interest rate.
George the mortgage broker, being the used car salesman that he is, turns around and gives you a separate guarantee for 6.75%. The markup of your mortgage interest rate by the mortgage broker is called Yield Spread Premium. George inflates your interest rate because he receives a bonus from the wholesale lender in addition to the origination fees you pay. George gets an additional point, or 1% of your loan amount, for each .25% he overcharges you. In this example George receives three points, or 3% of your loan amount. If you borrowed $250,000 to refinance your home, George gets an additional $7500, plus the 1-3% origination fee you paid. Can you see how Yield Spread Premium results in paying double for your new mortgage loan!
How can you outsmart your mortgage broker? The first thing you need to do is ensure you are working with an actual mortgage broker and not a broker-bank. Broker-banks are simply banks pretending to be mortgage brokers and should be avoided due to loopholes in the RESPA legislation. To ensure your mortgage broker is actually a mortgage broker and not a bank, ask the mortgage broker if they close on the loan in their own name. If the answer is ?No? and they close in the name of the wholesale lender, you know that you actually have a mortgage broker and not a bank.
Tell your mortgage broker that you will pay 1-1.5% origination and processing fees. Inform the mortgage broker that you will not pay Yield Spread Premium in any form. Tell the mortgage broker you will pay the closing costs including third party charges but zero markup by the mortgage broker?s company. Carefully comparing mortgage loans using the Good Faith Estimate and HUD-1 statement will help you find the most competitive loan offer. By watching your mortgage broker like a hawk and standing firm on the fees you pay, you will have out-witted your mortgage broker.
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Louie Latour specializes in showing homeowners how to avoid costly mortgage mistakes and predatory lenders. For a free copy of “Mortgage Refinancing - What You Need to Know,” which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
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