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