| The worst part of refinancing (other than the | | | | rate they lock with the bank. If a broker brings in |
| headache) is paying all those closing costs. With so | | | | a loan that is "above market" (e.g. a bank is |
| many hands in the cookie jar, the fees just keep | | | | offering a wholesale rate of 5% and the broker |
| piling up. And some of them are just plain stupid...I | | | | brings them one at 5.5%), the bank will |
| mean, why do I need title insurance for a | | | | compensate the broker for the additional yield. |
| refinance on a home financed in my name? If you | | | | Now typically, Frugal Franco does not advocate |
| have ever gone through the refinancing process, | | | | the use of a middle man as it tends to raise the |
| you know it can be quite a hassle. Unfortunately, | | | | price of the final product for the consumer, but in |
| there is nothing I can do about the refinancing | | | | the case of mortgage brokers, a well informed |
| process being a royal pain in the rear, but what I | | | | consumer can utilize the broker to their |
| can help you with is the cost of refinancing. There | | | | advantage. As already mentioned, mortgage |
| is a way to refinance your home without having | | | | brokers are offered wholesale rates as opposed |
| to pay any additional out of pocket expenses | | | | to the retail rates offered by the banks directly |
| AND without raising your principal balance. | | | | to the customer. The savings from the difference |
| With mortgage rates dropping like a rock in the | | | | in these two rates is often more than enough to |
| last couple weeks, I thought this would be the | | | | compensate for the broker fee, not to mention |
| perfect time to introduce the yield spread | | | | the fact that banks will also charge a loan |
| premium (YSP as it's know in the industry) | | | | origination fee that is higher than many of the |
| refinance. First lets look at the different players | | | | more aggressively priced mortgage brokers. |
| involved in our story. The loan originator is the | | | | The other reason a well informed consumer can |
| entity that sells you the home loan. They can be | | | | use a mortgage broker to their advantage is by |
| a bank, credit union, or mortgage broker. In the | | | | using the yield spread premium to cover their |
| case of bank or credit union, the loan originator | | | | closing costs. Simply tell your mortgage broker |
| will also own your loan as they will be the one's | | | | that you want to use the "lender credit" from the |
| lending you the money. The same is not true for | | | | yield spread premium to cover all (or a portion) of |
| a mortgage broker. A mortgage broker acts a | | | | your closing costs and they will quote you a |
| middle man that scours the wholesale loan market | | | | slightly higher rate than if you were to pay for all |
| to find the best rate. They collect a loan | | | | the closing costs on your own. |
| origination fee for their troubles and pass you off | | | | The rub in this whole process is the fact that |
| to a bank by selling your loan to the best bidder in | | | | there is no law stating that mortgage brokers |
| the wholesale market. | | | | must disclose this additional compensation, which |
| Typically, mortgage brokers will collect a flat fee | | | | increases the "sketchy factor" for the entire |
| for originating the loan (around 1% of the loan | | | | industry. In the next article I'll discuss how to |
| value on average), but can also make money on | | | | become a well informed mortgage loan consumer |
| the yield spread premium. The yield spread is | | | | as well as discuss which fees to cover with the |
| simply the difference between the rate a | | | | yield spread premium. |
| mortgage broker charges you and the wholesale | | | | |