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With mortgage rates inching downward, many homeowners are thinking about refinancing their existing mortgages to take advantage of lower mortgage rates. Maybe you’ve heard about wholesale mortgages that shave thousands of dollars off the cost, but don’t think they’re available to the average homeowner. Well the good news is, they are! And once you understand how mortgage rates are quoted, you’ll be in a better position to reap maximum benefit from wholesale mortgage rates.

Who quotes mortgage rates?

Banks and mortgage brokers are the places most of us go for mortgage quotes. The mortgage rates each offers are considered retail mortgage rates because the rates include a markup, but banks and brokers operate differently. A bank uses its own money as a funding source for mortgage loans and profits from the mortgage markup when it sells the mortgage loan to an investor. Mortgage brokers, on the other hand, resell mortgages offered by the wholesales lenders within their network. Usually when a broker closes a loan with a mortgage rate that’s higher than the prevailing market rate, the wholesale lender pays the broker a bonus.

Mortgage Rates and Broker's Fees

Because the mortgage rates offered by banks and brokers include a markup, it’s really the borrower who pays the profit that each makes. Once you realize you’re paying too much for your mortgage just so someone else can make a profit, the situation doesn’t make much sense, does it? Most of us do it though, because that’s what we’re accustomed to doing. If you really want to avoid paying too much, you should never discuss refinancing with a bank. The mortgage rates and associated fees that banks quote generally aren’t negotiable. Banks quote whatever they want to quote and aren’t required to disclose their markup or their profit. And doing so is completely legal because the Real Estate Settlement Procedures Act doesn’t require such disclosure. With the playing field so obviously unbalanced and benefitting the bank, why would you even attempt to give a bank your refinancing business?

With one of the two main sources of mortgage rates quotes taken out of play, you’re left to deal with mortgage brokers. But you’ve heard bad things about brokers: they’re not trustworthy, they’re fast talkers, and they care more about making a profit than getting you the best deal. Working with a broker in the wholesale lender’s retail department is the only way you’ll be able to access those wholesale mortgage rates. So now what? Well, as you would probably do with other major purchases, you have to do some research. You have to find a broker that’s reputable, and then you have to know how that broker gets paid.

No one disagrees that a broker should be paid. He or she is providing a service and that service should be compensated. On a typical mortgage, the origination fee, which usually is equal to one point or one percent of the amount borrowed, goes towards compensating the broker. That’s reasonable and that’s fair. But paying a loan processing fee isn’t. It’s simply an additional, pointless fee and if you’re asked to pay one, don’t. Negotiate it out of the deal instead.
But broker compensation doesn’t end with the loan origination fee. Wholesale lenders usually pay brokers a commission for every mortgage they close. The commission amount depends on the mortgage rates the borrower agrees to. The further above prevailing market rates those mortgage rates are, the more commission the broker earns. Not bad if you’re the broker. But if you’re a homeowner, the Secretary of HUD estimates that this commission, which goes by the name Yield Spread Premium, accounts for billions of dollars worth of mortgage overpayment each year!

Why should you contribute towards Yield Spread Premium?

The simple answer is you shouldn’t! Most borrowers pay it simply because they don’t know it exists. Now that you know it exists you also should know that for every quarter point increase in mortgage rates you agree to at closing, the wholesale lender pays the broker a commission equal to one percent of the amount you are borrowing. It doesn’t take a mathematician to see how quickly – and how easily – the broker’s commission can explode – at your expense!
Knowing that Yield Spread Premium exists is one thing. But realizing that you don’t have to pay it is the key to getting the lowest mortgage rates. Remember, brokers are paid two ways: the origination fee and the wholesale lender commission. Tell the broker you have no problem agreeing to a reasonable origination fee. After all, the broker is providing a service and should be compensated. But the broker should not be overcompensated by charging you inflated mortgage rates. Ask the broker if the lender is paying a commission. If so, you’ll know right away that the potential for such overcompensation exists.
Yield Spread Premium is negotiable

Know too that Yield Spread Premium is often negotiable, especially if you’re dealing with a self-employed mortgage broker who may be more willing to negotiate in the first place and who can negotiate without needing the approval of someone higher up, as is generally the case when working with a mortgage brokerage firm.
When refinancing, you should be able to take advantage of wholesale loans and their low mortgage rates. But to take maximum advantage, you need to know what mortgage brokers know about the fees you’re charged, which are marked up for the purpose of making a profit, and which are excessive fees that you shouldn’t be paying.
All of this and more is further explained in a video tutorial which we’re offering for free but only for a limited time. Get your copy today and you’ll take an important first step towards ensuring you get the lowest mortgage rates for your home refinancing needs.