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Refinancing? Watch for Hidden Fees
When homeowners refinance their homes, their lender provides them with a HUD-1 Settlement Statement. By law, this standardized form itemizes the services provided by the lender and any associated fees. Many lenders point to this form as proof that the rates they offer contain “no hidden fees.” But there is one fee that’s not required to be reported: the “yield spread premium,” which can inflate borrowers’ interest rates unnecessarily.
“While mortgage brokers are legally obligated to disclose the yield spread premium-kickback for inflating a homeowner's interest rate on a home loan or refinance mortgage bankers or banks have no such obligation,” explains a statement from the Mortgage Inspection Service, a firm that specializes in comparing bank rates to ensure that borrowers are getting a fair deal.
But how does the yield premium spread affect a homeowner’s borrowing rate? If a hypothetical customer qualifies for a 4 percent interest rate on a 30-year fixed loan in the amount of $200,000, an underhanded lender might try to get the borrower to instead accept a 4.25 percent rate. Just a quarter of a percentage point increase could lead to a profit of about $2,000 for the lender.
Because lenders have no legal obligation to disclose these fees, they sometimes sneak their way into refinancing transactions, particularly when large mortgages are being refinanced.
One way to catch such interest rate inflation is to pay careful attention to the Good Faith Estimate, prepared in advance by a lender, and the HUD-1 form that’s presented one day prior to a loan’s settlement. By seeing if any changes have been made to the interest rate, consumers can be made aware of any yield spread premiums – “no hidden fees” or not.
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