Debt Free

For most people, their mortgage is their single, largest financial obligation. If you find yourself lumped into that crowd, welcome to the party. If you have a mortgage, at some point in your life you'll probably get another mortgage (if there's anyone left who can actually qualify for one!), weather to refinance your existing loan, or to purchase another property.

The next time you're sitting in your mortgage broker's office, there are a couple of things you should know about the mortgage you're about to commit to. One important fact that you should know right up front is that your broker is getting paid. Nothing wrong with that, fish gotta swim, birds gotta eat, after all. It's how they're getting paid that you should be fully aware of. You should know that your mortgage broker is not only getting paid by you, in the form of fees tacked on to your loan (you can, and should, negotiate these down in most cases), but by the bank as well. If you weren't aware of this, consider yourself enlightened.

The money the broker makes from the bank or lending institution is actually, in most cases, far greater than the pittance (If you did a good job of negotiating) they'll receive from your fee. The bank's payment to the broker is referred to as the 'Yield Spread Premium'. What you may also not be clued in to is that this fee actually rises with the interest rate of your mortgage! That's right, the worse the loan for you, the better it is for your broker. A conflict of interest? Possibly so, but it drives home the point about the importance of finding a trustworthy mortgage broker. Don't worry, there are plenty of them out there, but it's up to you to find one. Just make sure you ask them about the yield spread premium, and how much they stand to make from your mortgage. You should be able to find it on your good faith estimate under the heading 'YSP', or possibly 'POC'.

The other little fact that most brokers don't clue you in on is that, like the F&I guy (or gal) you have to sit with when you buy a car, they usually get paid on all the extras and contract clauses that are advantageous for the bank or lender, but less so for you. Typically many of these clauses can be eliminated for many classes of mortgage. On big one is the prepayment penalty. Banks love this penalty, because it helps protect their investment. They count on receiving a certain amount of interest from you before you either pay off your loan during the term, or eventually refinance it. To ensure you actually pay them what they want, and help ensure they can count on a certain amount of interest income, they insert a penalty clause in your contract. That means they get a monetary penalty from you should you get out of the loan early. It sucks for you and can keep you from refinancing into a better mortgage product should the need or opportunity arise.

So, you need to:
1 – Trust your broker, but verify

2 - Know what fees will be rolled into your loan and negotiate them down, preferably to 1% or less. Then, make sure they don't back out on the negotiated fees prior to closing. I have saved thousands of dollars negotiating lower fees like this, and you should too. This doesn't include the application fee, which you should NEVER pay.

3 – Ask about the broker's pay structure, the yield spread premium, and how they're incentivized for the various contract items along the way.

Look at the possibility of asking the broker to agree to a set fee up front, in lieu of the hidden fees they typically receive. Some do this now, but not many.

There are fewer lenders out there by the day, due to the problems in the mortgage industry. As the competition thins out a bit, you may think you'll be unable to find a good mortgage. Most likely you'll do just fine, but you've got to be your own advocate. Don't be a wimp. Many people are simply too chicken to actually ask the tough questions. They feel bad or find it distasteful. Well it may be, but so is getting stuck with a crappy mortgage, and that pain could last for 30 years.