Owning a home is an important investment for people to make. The investment can increase over time, and offer a lifetime of security. More often than not, though, people aren’t able to buy a home outright. This is where a mortgage or home loan comes into play. And, over time, as financial and economic situations change, borrowers may opt to refinance their loan to find more favorable mortgage rates and terms. This is where wholesale mortgage rates and lenders can prove useful.
Wholesale mortgages are given to larger lenders or to independent financial groups.
To fully understand the concept, you need to know how a mortgage broker is compensated. This well arm you with the ability to identify red flags and negotiate when asked to pay too much on a refinance option.
The ins and outs of the lending business
Mortgage loans are products just like goods in a store. They are bought and sold, with the seller or lender trying to get more than they paid. The middleman is usually the mortgage broker (or the staff member at a bank or credit union) trying to get an individual to invest in a loan. Thus, it is important to do a bit of research to find out what the going rate for a loan is.
If a broker’s aim is to make money, make sure they are also being fair – don’t get caught paying a broker too much money in fees. This is where understanding hidden players in the game, like wholesale lenders, can help give you the leg up in your research and negotiations.
Wholesale mortgage lenders can offer low rates on refinances, but in order to land a great deal, arm yourself with knowledge of the lending industry. (Photo/MaxPixel)
What is a wholesale mortgage company?
Wholesale mortgage lenders are similar to other lenders in that they originate and service loans. They also sell them. One of the primary differentiating factors between a wholesale lender and a traditional mortgage banker is that while most mortgage bankers have wholesale and retail divisions, wholesale lenders can be independent operators. This means they are not tied to particular mortgage brokers or loan officers to originate loans, which can give them extra padding to offer lower rates.
Brokers and loan officers work on the retail end with borrowers, and once they secure a deal, they send that deal to a wholesale mortgage lender for underwriting and processing. The wholesale mortgage lender will fund the loan, and usually sell it on the secondary market within a month or two.
Finding the best wholesale mortgage lender: Use the one percent rule
It’s common for wholesale mortgage rates to be considerably cheaper than their retail counterparts.
To find the lowest wholesale refinance mortgage rates, a borrower will need to reach out to a broker. Brokers typically charge a small fee, and retail mortgages comes with strings attached to them, too.
Retail refinances loans includes the loan’s markup and the interest rate plus any associated fees. Brokers often receive compensation by charging the origination fee of a home loan which is usually a piece or percentage of the mortgage.
So, how do you know if you’re getting a good deal?
The point is to find a mortgage broker who will work with the one percent rule. Brokers that are a part of the Upfront Mortgage Brokers Association agree to this and to pursue the business with honesty. The one percent rule means finding a great refinance mortgage where the borrower only pays one percent on a loan.
The homeowner should always remember that he or she is the customer. Thus, if a broker refuses the one percent rule, the customer should walk away.
The yield spread premium
Brokers also make money by marking up a loan’s interest rate. This increase is called the yield spread premium.
A homeowner needs to always ask about this amount. Yield spread premiums can end up being shady if a broker explains this fee or amount in vague terms. A yield spread premium only makes sense when it is used to pay for the homeowner’s closing cost fees. Otherwise, you should be wary of this fee.
Individuals need to show brokers that they understand the yield spread premium and need to explain their finance needs. If you have a good feeling about a broker, ask for a Good Faith Estimate and a HUD-1 which will list whether or not the premium is included. You can compare your gut feeling with an itemized account of the yield spread premium.
People should compare these documents to ensure that rates are as they should be.
When to work with wholesale mortgage lenders
A wholesale mortgage is one that cuts down the markup often involved with mortgage rates. Thus, one will pay less commission on this loan, will have more favorable loan rates, and can pay this item off more quickly than past loans. This is why knowing the ins and outs of the wholesale mortgage world can prove beneficial – it can save you money over the life of your loan.
As with anything, there is no guarantee on which avenue for refinancing will be the most cost-effective for you. It’s important to weigh different options, and do your own research before selecting the right path. One surefire way to see what type of lender or refinance product makes sense for you is through the use a mortgage calculator. You can calculate how your monthly, and life of loan, costs will differ from loan to loan. You can also pit different lenders against each other to see who can offer the best deal.