Miscellaneous Mortgage Refinancing Tips: Understanding Broker Incentives

Home Mortgage Refinancing: An Overview on Brokers

When you are refinancing, you’re striking a balance between your lender’s needs and your needs. The company you choose to work with will have a large bearing on how this pans out for you. Although lenders and brokers are in business to make money, some are in business to fleece customers, so it pays to understand how the deal will affect everyone before you interview anyone.

Home Mortgage Refinancing: What is a Broker

First of all, remember that a broker is the party who brings a lender and borrower together. The broker doesn’t lend the money, but must be paid somehow. This leave the field open for dishonest practices, especially by sub-prime lenders who often pay kickbacks (technically called yield spread premiums, of YSPs) to brokers for providing customers they can charge higher interest rates.

Brokers and Interest Rate Steering

Brokers also sometimes participate in “interest rate steering.” This involves a judgment on how savvy of a borrower the broker or lender things you are. It’s a matter of “getting away with as much as they can.” If they think you don’t know anything about the mortgage market, they will try various ways to convince you to sign for a higher interest rate. Older people, low income families, minorities, and those experiencing financial setbacks or crises are often the targets of these techniques.

Make Your Positions Clear -- Stay Firm

You need to be firm in what you will pay or not pay. First, study the process of refinancing so you can understand the steps involved and who benefits from what. Know the current rates, and read economic news—especially government announcements—that will help you decide what to say to the lender and broker. Put caps on how much you will pay for loan origination fees, processing costs, etc.; also make sure you get a locked in rate with the stipulation that if the rates change you will only be affected if they go down and not up.

The YSP

When it comes to the YSP, that should be one cost that is non-negotiable on your end. Remember that the lender pays a “commission” for this (which amounts to a kickback), and this commission is not your responsibility. Tell them up front you will not pay any YSP, also more simply known as a markup. Once you have laid down the law, make sure the company doesn’t change your interest rate—ask to see the rate from their wholesaler. If they refuse, you’re in the wrong place. This mortgage company will be nothing but trouble.

Compare Wholesale Rates

When you do get your hands on the wholesale rate, compare it to the mortgage company’s own rate. If there is a difference, they are still trying to charge you a YSP. Time to walk. In any case, always check this aspect of your loan with an expert like a lawyer—it will be worth a few bucks to save potentially thousands.