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Advantages and Disadvantages of Mortgage Refinancing

In this article we are going to talk about what every bank and mortgage company doesn’t want you to know. They don’t want you to know that every single mortgage loan is marked up by as much as 3 points by the loan originator. now is a good time to cover a bit of terminology,because you can’t get far with refinancing your mortgage with out coming across the term “points”.

A point is simply 1% of your loan amount and they come in several varieties. There are the origination point that you pay to the mortgage company or broker for their part in setting up your loan, and you have the discount points you pay in exchange for a lower interest rate or more favorable loan terms. points can also be paid to your mortgage lender or broker as a bonus for over charging you and that’s what we are going to discuss in this article.

Now these bonus points we are talking about are paid to your mortgage company or broker by the wholesale lender. So if  the wholesale lender is paying the points instead of you, why should you be concerned ?

Advantages and Disadvantages of Mortgage Loan

This money the wholesale lender pays is a reward for your mortgage company over charging you. You are already paying origination fees for this company’s services often in excess of a point and a half, and this is more than ample compensation for the amount work that they do. By marking up your mortgage interest rates to line their pockets, you’ll be paying thousands of dollars more for your mortgage financing just in the early years of your loan.

Here’s how it works. For every .25% your mortgage company marks up the interest rate, your whole sale lender pays them a bonus of 1 point, of course they will never tell you that they are doing this, and in the case of a mortgage company or broker, their markup is very deep in their disclosures.

Banks on the other hand, don’t have to tell anyone what they are doing because they are exempt from RESPA  laws. Now the extra interest on your loan makes it significantly more valuable on the secondary market because lenders receive mosts of the interest up front. Mortgage loans are front loaded with interest, meaning you pay most of the finance charges in the early years of the loan.

Let’s take an example of how this works: Suppose you are going to refinance your mortgage for ex. $ 200,000, and the mortgage company says that you are going to pay 1 point for the origination fee. Well as you know 1 point is 1% of your total loan amount, and in this case it would be $ 2000.00.  Then the mortgage representative tells you that you qualify for a 6.75% interest rate, which you think is reasonable, so you agree to the terms and take out the loan. However, what the mortgage company is not telling you is that you actually qualified for a 6.0 % interest rate, but they marked it up to 6.75 %. Because they overcharged you and you agreed to the terms, the mortgage company receives 3 points.

Remember they get 1 point for each 0.25% that they mark you up, which now comes to a total of $ 6,000.00 as a bonus for overcharging you.

Lets break this down.. The mortgage company gets $ 8,000.00 ( $2000.00 origination fee plus $ 6000.00 bonus from the loan wholesaler) for originating your loan. In the end you pretty much get screwed because you agreed to pay 0.75% more than you needed to. That 0.75% amounts to thousand of dollars in unnecessary mortgage interest, and that’s just in the first years of your loan.

So now when I say these people are just like used car salesmen, you’ve got the numbers to show it and you understand how this scam works.

Now this unnecessary markup of your mortgage actually has a name. When a markup is charged by a mortgage company or a broker, its called a “Yield Spread Premium”. When your mortgage is marked up by a bank or broker bank it’s called a ” Service Release Premium”

We have already talked about why you shouldn’t take a mortgage loan from your bank, but what is a “Broker Bank” ? Broker banks are simply banks masquerading as mortgage brokers. They do this to exploit the loopholes in the disclosure laws as regular banks do , and prey on homeowners who just don’t know any better.

Broker banks are nearly indistinguishable from any mortgage broker, both in the offline world and on the Internet. you should never refinance your mortgage with a broker bank for the same reason you should never take out a mortgage loan form your bank. One example of a broker bank operating on the Internet that you need to avoid is ELoan.com.

So how can you tell if your mortgage broker is really a broker or a broker bank ? Ask them if they close on the mortgage loan in their own name. If the tell you no, then you know that they close in the name of the wholesale lender therefore  you have found a genuine mortgage broker.  Eloan.com for instance closes in their own name and therefore as a broker bank, is exempt for all disclosure laws that protect you from abusive lending practices. So never refinance your mortgage with Eloan.com.

However in general, mortgage companies have different ways of disguising the markups of your mortgage rates. Sometimes they will call it “Overage ” , ” Broker Rebate”, ” Lender Paid Fees ” or ” Lender Paid Compensation”. All these terms are rally just a slick marketing ploy to divert your attention away from what they are actually doing with your mortgage interest rates.

In the next article we will talk about what you can do to avoid paying these mark ups.

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