What You Should Know About Mortgage Yield Spread Premiums
A Yield Spread Premium (YSP) is a mortgage broker’s profit, which is paid by the lender in exchange for a higher interest rate. It is a way to avoid charging the borrower any out-of-pocket fees and lower up-front closing costs on the borrower’s loan, if they understand the contract. However, Most of the time a yield spread premium
confuses many homeowners ans they end up choosing the deal that "sounds" better..
This is how a Mortgage Yield Spread Premium works:
- If a borrower chooses a lower interest rate, he/she will pay the up-front the processing fees, 3rd party costs and YSP (Yield Spread Premium)
- If a borrower chooses a higher interest rate with 1% as YSP (paid by the lender to the broker), the borrower will only pay the up-front the processing fees and 3rd party costs.
- If a borrower chooses a much higher interest rate with 2% as YSP (paid by the lender to the broker). The broker will credit the borrower the 3rd party costs in the form of a Yield Spread Premium (YSP).
In totality, it is best to choose the higher interest rate if a borrower intends to refinance the property after 2 to 3 years. However, if the borrower intends to keep the house until the loan is paid off, then it is advisable to get the lower interest rate and pay the up-front third party fees and mortgage brokerage fees. Borrowers must carefully review their HUD-1 or Good Faith Estimate and check the POC (paid outside of closing) to see the YSP made from their loan.
By TILA regulation, the Yield Spread Premium (YSP) must be disclosed to the borrower before the credit is extended. If the consumer borrows from the bank directly, the bank is not required to disclose the profit it earns. Lending through a mortgage brokerage is the only type of loan with true transparency, where the profit is open for the borrower to see.
