If you have little tolerance for financial risk and are considering mortgage refinancing, choosing a fixed interest rate is usually the safest option. Fixed rate home loans come with higher interest rates than their Adjustable Rate Mortgage counterparts; however, there are steps you can take to pay less when refinancing. Here are several tips to help you qualify for the lowest mortgage rate when refinancing.
The most important concept you need to wrap your head around before refinancing your mortgage is how Yield Spread Premium works. Yield Spread Premium sounds scary and will cost you thousands of dollars unnecessarily; however, once you understand it and learn how to recognize it, you’ll save yourself a bundle of cash on your mortgage payments.
What is Yield Spread Premium? Simply put, it’s the retail markup of your mortgage interest rate by the person originating your loan. This person could be a mortgage broker, the representative at your local mortgage company, or the faceless internet giant you find on the web. Every mortgage company, with the exception of banks, works the same way when it comes to originating mortgage loans. They all mark up your mortgage rate to get a bonus from the wholesale lender behind your mortgage.
Fixed rate mortgages already come with higher mortgage rates than a comparable Adjustable Rate Mortgage. In addition to paying this higher mortgage rate you’ll be required to pay an origination fee for this person’s role in arranging your home loan. Here’s an example to illustrate how Yield Spread Premium results in paying double, even triple when refinancing.
Suppose you refinance your home loan for $300,000. Your mortgagee broker quotes you an interest rate of 6.75%. You agree to pay a 1% origination fee which is a reasonable amount to pay when refinancing. Think you’re getting a good deal? What the mortgage broker isn’t telling you is the interest rate you qualified is actually 6.0%. They’ve marked it up to 6.75% because the wholesale lender pays them 1.0% of your loan amount for every .25% you agree to overpay. In this example you paid $3,000 for the loan origination and the mortgage broker received $9,000 from the lender for overcharging you.
Your mortgage broker walks away with $12,000 and you get stuck paying thousands of dollars in unnecessary mortgage interest. Not such a good deal after all is it? Fortunately for you, once you’ve learned how to recognize Yield Spread Premium you can avoid paying it. To learn more about refinancing your home loan while avoiding costly mistakes register for a free mortgage video tutorial.
To get your FREE six-part Mortgage Refinancing Tutorial, visit RefiAdvisor.com using the link below.
Louie Latour specializes in showing homeowners how to avoid costly mortgage mistakes and predatory lenders. To get your hands on this free video tutorial: "Mortgage Refinance - What You Need to Know," which teaches strategies for finding the best mortgage and saving thousands of dollars in the process, visit Refiadvisor.com.
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