What Is Yield Spread Premium?

Many people don’t know about a yield spread premium. It is a set of fees paid to the mortgage broker by the mortgage lender in return for the amount of loan that contains higher interest rate. The rate that is above the par rate is known as the higher interest rate. Whereas, the rate that is at zero points is a par rate and these points are expressed as a loan percent. Each of these points is typically 1% of the total amount of loan. In simpler words, one point for a $300,000 loan is $3,000.

Simple definition of YSP

In simpler words, YSP is the amount of money that is paid to the mortgage broker. Mortgage brokers receive more money for every loan that they give out. The mortgage broker quotes the interest rates that are higher than the par rate and in return gets money back from the mortgage lender. In this process, mortgage lender pays the broker points to the mortgage broker for booking the borrower into a higher rate than par rate.

On the other hand, mortgage lender charges borrowers the points for the rates that are below the par rate. For instance, borrowers are required to pay off the points when they purchase down the rate. The additional points that are charged by the broker now go to the lender and they will receive a lower rate.

In the mortgage industry, yield spread premium is a pricking issue. Several interest groups identify them “illegal kickbacks” and according to them YSP is a referral fee that is charged by the mortgage lenders to the mortgage brokers. Some other critics accuse the mortgage brokers and they say these brokers navigate their clients to lenders. These lenders pay brokers yield spread premium so that brokers could get bigger fees. There are also some brokers who “overcharge price” to unsuspecting borrowers. But mortgage brokers do not always need YSP to price overcharged borrowers and they can simply overcharge points to borrowers.

YSP & Closing Costs

The Department of Housing and Urban Development state that yield spread premiums plays a helping role by help in reducing the closing costs.  Due to yield spread premium, borrowers are required to pay lower fees at closing in return for paying a higher interest rate. This feature if useful for low income borrowers and they can easily buy their own house without the tension of big closing costs. The fees with the most of the loans with YSP are utilized to offset the closing costs of the borrower. The closing costs of the borrower are paid by the mortgage broker with the yield spread premium. The mortgage brokers earn the difference of the closing costs.

A Good Faith Estimate

Borrowers get to know about the yield spread premium first time only at the time of signing loan documents. The amount is not disclosed by the broker until the HUD-1 Settlement Sheet is ready that is a day or more before the closing. You could a god faith estimate in order to avoid surprise closing. The good faith estimate is inclusive of all transaction fees (direct and indirect) and the particular services earning those fees. Never hesitate to ask questions if you have nay doubts in your mind about the good faith estimate. You can carry out a search and compare fees and rates from broker to broker.

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