Home Mortgage Refinancing Guide

Yield Spread Premium is one of the least known, yet expensive mistakes homeowners make when refinancing a mortgage loan. Most homeowners have never heard of Yield Spread Premium, and if you agree to pay this markup of your mortgage interest rate when refinancing you will spend thousands of dollars unnecessarily.

So what is Yield Spread Premium? Assuming that you are not refinancing with a Bank (we’ll talk about Bank originated mortgages later), Yield Spread Premium is the markup of your mortgage interest rate by the person originating your loan for a higher commission. Here’s how this markup works.

Mortgage loans are retail products; with the exception of bank originated mortgage loans there is always a wholesale lender behind your mortgage. When this wholesale mortgage lender approved you for mortgage refinancing, you are approved for a specific wholesale mortgage interest rate. This rate was provided to your loan originator, be it your mortgage company or broker. This person marks up the interest rate you were approved because the wholesale lender pays them a bonus for charging you more.

That’s right, for every quarter point you agree to pay over the mortgage rate you qualified, this person receives a bonus of one percent of your loan amount. This bonus is in addition to the fees you’re already paying for the application and loan origination. If you unknowingly agree to pay this markup you are effectively paying this person double for the work they do in addition to overpaying thousands of dollars for your new mortgage.

What about Bank mortgage loans?

There’s no wholesale lender with a Bank, aren’t you better of refinancing your mortgage through your Bank? While it’s true that Bank originated mortgages are a convenient way to refinance your mortgage, Bank loans are not exempt from mortgage yield spread. When a Bank marks up the wholesale mortgage rate you would have qualified it simply has a different name. Banks mark up mortgage interest rates to boost their profit when your loan is sold to investors on the secondary market. When this markup is done by a bank it is called Service Release Premium and due to a loophole in the Real Estate Settlement Procedures Act, the Bank is not required to disclose that they are marking up your mortgage interest rate. It is because of this loophole that you should never refinance your mortgage with a Bank.