Your broker might pay you to refinance
While I have addressed this issue before in my column, I’m going to discuss it again because most people still don’t believe it’s true. Quite often a mortgage broker (and banks are not brokers) will actually pay you to refinance.
I know that mother told you if it sounds too good to be true it usually is, and why would a mortgage broker leave money on the table for you when walking out of your loan closing?
But in the case of refinancing your home, it can actually work out that you will make a few bucks for your trouble and still enjoy a lower rate and payment. It’s all quite legal and aboveboard if you go with a mortgage broker for your refi, but you will not get this deal from a commercial bank because legally they can keep the money and they generally do.
How this works is that when a broker delivers a loan to a lender they get paid a percentage of the loan amount dependent on the rate and terms. That percentage varies based on innumerable factors but in general the higher the rate the higher the percentage. This is called yield spread premium or YSP.
But the broker is restricted to making the same percentage fee on each loan regardless of the rate charged the borrower, this discourages brokers from pushing a higher rate to make a higher fee. The broker must set his percentage generally quarterly in advance and all loans from then on are at a set percentage (usually this is 1.5% to 2.0% of the loan amount).
The difference between a bank and a broker is the bank is not required to make the same percentage on each loan, and they will keep whatever the difference is usually.
If the broker is making 1.75% on all loans and the borrower picks a rate that pays 2.75% then the extra point belongs to the borrower to use towards closing costs and prepaid items for opening tax and insurance escrows or interest due for the current month at closing.
So let’s assume we have a loan of $400,000.00 and a broker origination fee of 1.75% ($7.000) and a YSP of 2.75% ($11,000). The normal loan closing costs including title, appraisal, credit, filing and underwriting fee might run about $2,800.00.
Out of that $11,000 first the brokers fee of $7,000 is paid, next the borrowers third party closing costs of $2,800 are paid, making this a no cost loan for starters. There is still $1,200 left over out of the $11,000 and that money would be applied towards the funds required to open the borrowers escrows accounts for taxes and insurance.
As the borrower is going to have to pay the taxes and insurance one way or the other, this is in reality tax free money to the borrower. The lender the broker has delivered the loan just pgave the borrower money for the brokers origination fee, the borrowers hard closing costs and gave the borrower $1,200 to boot in tax free money.
Mom may tell you not to believe this one, but I can assure you it’s quite real. We can’t do this on every loan (most notably non-owner occupied or jumbo loans over $625,500) and to be quite clear, you will pay a slightly higher rate.
The YSP also varies on the loan to value, credit score, loan type, property and a host of other factors and the bond market activity. Often times the YSP can change several times a day until it is locked in as well, so if you are shopping your loan be sure nothing changed when you make your final decision and get it in writing.
But as with everything, cost vs. benefit is the number to run, and it generally is worth it to pay an extra 1/8th to ¼% on the rate and get rid of closing costs. On a $400,000 loan today the rate with the above scenario would be 3.50% (assuming it was a owner occupied, rate and term refi with good credit and 75% LTV). You payment would be $1,796.00 for principal and interest. If you wanted to pay all your closing costs the rate would be 3.25% and your payment would be $1,740/mo. You would save $56/mo but you would lose that $11,000 credit. That would take 16 years to make up the difference!
Call me at 970-748-0342 or click here and e-mail me your questions!I serve all the mountain resort communities including Vail, Avon, Beaver Creek, Eagle, Gypsum, Steamboat, Aspen and the Summitt County comminities of Copper, Frisco, Dillon, Silverthorne and Breckenridge.
