subject: Is Your Mortgage Rate Too High? [print this page] Many homeowners, when shopping for a lender in order to refinance their home, don't shop the internet. If you intend to look online for a lender, there are a few things that are different than shopping for a lender in the offline world. The internet offers myriad possibilities in finding a compatible lender, but you also have to be extra careful about watching for hidden fees and issues with your interest rate.
-- Yield Spread Premium... wait, what? Isn't "spread" for football games and the like? Well, yes. But, the Yield Spread Premium is simply a fancy term for commission paid to the person arranging your loan; it's really more like a bonus for overcharging you. Most people have never even heard of this term.
The simplest way to calculate your break-even point is to divide your total costs in acquiring the new loan by the amount by which your monthly payment has been reduced. While this is not exact, it will give you a rough estimate of how long you have to wait after recouping your expenses and start actually saving money. There are more involved (and more exact) methods of calculating your break-even, but they are beyond the scope of this article.
As an example, using round numbers for simplicity, if you refinance a $200,000 mortgage which costs you $6,000 in origination fees and costs. Your new payment is $1,581.58 per month for 15 years (at 5%). Your savings from your older payment are $160.63 per month; so in 37 months (just over three years) you will have recouped your costs and begin saving money.
What they didn't tell you is that you actually qualified at 5.5%; but your mortgage broker marked up your interest rate to get a higher commission from the actual lender. The lender pays the broker a bonus, generally 1% for every .25% of extra APR -- in this case, an extra 2%, while YOU are stuck paying a .5% in interest for the remainder of your loan -- simply because the broker wanted a higher commission! In this case, you'd be paying almost $100 amonth more than you need to, for a total of just under $1,200 a year that you could have been spending on other things. Be careful when mortgage shopping; watch out for the Yield Spread Premium.
by: Adam Wesley.
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