Yield Spread Premium (YSP) is a concept every homeowner in America needs to understand; however, very few people know what it is or how to a avoid it when taking out a mortgage loan. According to the Secretary of Housing and Urban Development, Yield Spread Premium is responsible for homeowners in the United States overpaying nearly sixteen billion dollars this year. Here are the basics you need to know about Yield Spread Premium and how you can avoid paying the markup.
What is Yield Spread Premium?
Simply put, Yield Spread Premium is the markup of your mortgage interest rate by the person originating your mortgage loan. Your loan originator could be a mortgage broker, Internet lender, or a local mortgage company. Banks are not included in this discussion because the do not charge Yield Spread Premium. This doesn’t mean bank loans do not have markup; bank loans have the same markup but due to loopholes in disclosure laws this markup is called Service Release Premium and is the topic of a later discussion.
How Does Yield Spread Premium Work?
The examples I’ll use here today will all be loans originated by a mortgage broker; however, brokers are the only type of lender that charges Yield Spread Premium. Nearly every mortgage quote you find on the Internet includes markup of some kind. Your challenge as a homeowner is learning how to recognize this unnecessary markup so that you can negotiate to avoid paying it.
Yield Spread Premium is a bonus or “kickback” paid by your lender. Many loan originators try and explain Yield Spread Premium away by telling you that you don’t have to worry about his fee because the lender s paying it; that it doesn’t come out of your pocket. Don’t be fooled by this lie. While it’s true the lender pays Yield Spread Premium, it is being paid because you’ve accepting an above market interest rate. To add insult to injury you’re already paying a perfectly reasonable fee for the mortgage broker’s services. Many brokers feel they’re entitled to Yield Spread Premium on top of the origination fee you’re already paying. If you agree to accept a loan that includes Yield Spread Premium you are doubling and in many cases tripling your broker’s commission.
Yield Spread Premium in Action
Here’s an example of a typical brokered mortgage transaction that includes Yield Spread Premium. In this example our homeowner is called Jeannie. Jeannie is refinancing her $250,000 mortgage and taking $50,000 back to consolidate her higher interest debt. Jeannie is doing this because she’ll pay less interest on the debt when it’s secured by her home and she can deduct all of the interest she pays on her Federal income tax. Like many homeowners Jeannie has never heard of Yield Spread Premium and has chosen a mortgage broker recommended to her by a friend without comparison shopping rates or fees.
Jeannie’s first mistake is choosing a mortgage broker based on the recommendation of her friend. Comparison shopping is an important part of choosing a mortgage loan, regardless of Yield Spread Premium. Because you’ll be required to pay an origination fee and closing costs it is important to consider these fees when choosing a mortgage company or broker. Jeannie’s broker is charging her 2% for loan origination, because she skipped comparison shopping she doesn’t know this is too much and a reasonable fee for loan origination should not be more than 1% of her loan amount.
Jeannie’s broker tells her that she qualifies for 8.75% mortgage rate on a $300,000 30-year fixed rate mortgage. Her broker explains that the interest rate is higher because she’s taking cash back but assures her this is a good deal. Can you see the problems Jeannie’s overlooked? Aside from paying entirely too much for loan origination, Jeannie’s mortgage rate is high not because she’s taking cash back, but because her mortgage broker marked it up. The wholesale lender approved her for a 7.75 mortgage rate; however, the rate she was quoted includes a whopping 1.0% Yield Spread Premium.
Mortgage brokers mark up interest rates because the lender pays them 1.0% of the loan amount for every .25% the homeowner agrees to overpay. In Jeannie’s case she is paying $6,000 out of her own pocket for the broker’s services. Her mortgage broker helped himself to an additional 4% for a total of $18,000 for overcharging Jeannie. Your mortgage company or broker will never admit they’re doing this and it is frequently left off the Good Faith Estimate. Mortgage lenders with the exception of banks are required to disclose Yield Spread Premium on the HUD-1 statement; however, they all have clever ways of disguising or explaining away their markup.
Let me make one thing clear; Yield Spread Premium serves no other purpose than to give your mortgage broker or loan originator a commission. Occasionally, an honest broker will allow you to use Yield Spread Premium in lieu of a down payment; however, these transactions are fairly rare. While the unnecessary markup of your mortgage interest rate for the broker’s commission is perfectly legal, it is occasionally a topic of heated debate in Congress.
How Can You Avoid Yield Spread Premium?
Once you’ve learned to recognize Yield Spread Premium you can negotiate with your loan originator to avoid paying the markup. Remember that many brokers conveniently leave Yield Spread Premium off of your Good Faith Estimate; however, it will appear on lines 810-811 of the HUD-1 statement. You can negotiate with potential mortgage companies and brokers by telling them that you understand how Yield Spread Premium works. Tell them you will pay a reasonable fee for the origination of your mortgage, not more than one percent but will not accept any “lender paid” compensation with your loan.
Many brokers will argue with you or get angry when discussing their compensation; if you encounter an individual like this it’s time to move on to the next broker. It may be helpful for your negotiations to deal with the owner of the brokerage firm you are considering. Junior mortgage brokers may not have the authority to put together the deal you are looking for on your loan.
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