Are You Thinking Of Refinancing?
When refinancing your house, the first thing to consider is your lender. While mortgage brokers have a reputation for overcharging, your local bank may not be the best option, either. Educating yourself prior to shopping for a lender could save you much money.
Think of mortgages as a grocery business. The wholesalers of mortgages (actually “the manufacturers”) write the actual mortgages and your local mortgage broker is analogous to your local grocery store. The grocery store, much like the mortgage broker, has to make a profit; therefore, they mark up what they are selling you in order to make more profit.
Banks make the majority of profit from mortgage lending by selling the mortgages to the secondary mortgage market. They maximize this profit when they write a mortgage with above-market interest rates. The bank count on the fact that most consumers are bewildered by the prospect of obtaining a new mortgage or refinancing, and therefore don’t know the going wholesale rates for mortgage loans. The best way around this is to find a mortgage broker with a good reputation — one that makes the bulk of their money on origination fees, rather than interest rate mark-ups. Then, you can find out what the local wholesale rates are for a new mortgage and a refinance (they’re generally different rates) and you can compare the broker’s rate with the bank’s rate, and see who is marking up their interest rate more.
Here’s an example of how the Yield Spread Premium works: Say, for example, you’re getting a loan for $200,000. The originating lender approves you at 5.5%. However, your broker marks that up to 6.75% without telling you. Now, of course, you’re paying a few hundred more each month in interest; over the life of your loan you’ll be out thousands of dollars. But it gets better. that 1.25% difference in what you go approved for and what you’re going to be paying — that’s the Yield Spread Premium. And for each 0.25% that the broker increases your loan interest rate, the broker gets 1% (of the original loan amount) up front — as a useless commission. In this example, he’s getting $10,000 in addition to the $2,000 loan origination you’ve paid.
Now that you know some of your options, you can make a more informed decision. There are quite a few options available that are able to help you during this time.
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