Home Refinancing Update

We have completed the Home Refinancing process and we are very happy with the results. It only took about 2 - 3 weeks from start to finish, and surprisingly enough, the Good Faith Estimate from the Mortgage Broker was for the most part, right on the money. Going into the process, I was a bit apprehensive because a colleague of mine had recently finished the refinance process and the actual costs were significantly different from the Good Faith Estimate (He used a different company than I did).

I used Colonial 1st Mortgage. Based on my experience, I would recommend them.

Throughout the process, I did educate myself a bit on the differences between obtaining a mortgage through a brokerage versus obtaining a mortgage through a bank. To strip it down to the most basic difference are these:

For banks, the cost of financing are paid on the front-end through origination, points, and other fees. Those costs are pretty visible to the borrow on the Good Faith Estimate.

For brokerages, the cost of financing are for the most paid on the back-end by way of a "Yield Spread Premium" (YSP). The YSP costs are much less visible to the borrow because they are handled after the financing is complete and it occurs between the broker and the lender.

Just because the YSP is not as visible to the borrower, it is not necessarily a bad thing---as long as you have a mortgage broker that is honest.

Here is how YSP works. Lets say that your particular credit score qualifies you for a loan with a 5% interest with Acme Bank. If you were to go directly to Acme Bank to get the financing. To make it worth their while, they would need to make some money on the financing transaction. They would do that by charging an origination fee (generally a percentage of the total amount financed). So let say that you were looking to borrow $100,000 and the origination was 1%. Acme would effectively make $1,000 for the transaction. If you were to go through a broker instead, they can get away with not charging you an origination by effectively upping your interest rate. The lender agrees to pay the broker a premium for "upselling" the interest rate. Again, this is not a bad thing. So in our example, the broker would sell you a loan with a 5.25% interest rate, with no origination. When lender in turn, rewards the broker with $1,000 for upselling the interest rate (from 5% to 5.25%). YSP is this process of the lender paying the broker on the backend for upping the interest rate. In effect, YSP is "negative points".

Again, although YSP may appear nefarious, as long as you have an honest broker, YSP may be a BETTER way to go for your finance. For instance, if you are strapped for cash for closing costs, YSP is a way to keep the front-end closing costs low. Additionally, if you anticipate you living circumstances to change in the next 5 years (move, refinance), then YSP may be cheaper. It all depends.