If you’re a homeowner considering a new mortgage, learning about Yield Spread Premium is well worth your time. If you unknowingly accept a loan that includes Yield Spread Premium you could overpay thousands of dollars every year you keep the loan.
What is Yield Spread Premium?
Simply put, it is interest rate markup by the person arranging your loan so that you lock and close with an above market mortgage rate. Mortgage originators do this because lenders reward them for closing loans at higher than market interest rates. In fact, lenders pay 1.0% of the loan amount for every .25% you agree to overpay. The difference between the mortgage rate you could have and the above market rate you pay is Yield Spread Premium.
Yield Spread Premium in Action
Suppose you refinance your home with a $200,000 loan at 6.75%. Your mortgage broker charges you 1% of your loan amount for the origination which is a reasonable amount to pay. What the broker isn’t telling you is that the wholesale lender approved you for a 6.0% and they’ve marked it up for a commission. In this example your mortgage broker pockets the $2,000 loan origination fee you pay plus $6,000 from the lender for overcharging you. You get stuck paying an above market mortgage rate and your broker walks away with $8,000.
You Can Avoid Yield Spread Premium
Fortunately, homeowners who understand how Yield Spread Premium works can avoid paying it. When shopping for a loan offer tell your potential brokers that you understand Yield Spread Premium and will not tolerate lender paid compensation with your loan. Ask to see the rate sheet from your wholesale lender and compare it to the interest rate guarantee you receive from the broker. You can also find Yield Spread Premium disclosed on your HUD-1 statement. This markup is usually listed on lines 810-812. You’ll often see it listed as “Yield Spread Premium paid by lender” or called YSP or POC. (POC stands for “Paid Outside Closing”)
You can learn more about refinancing your mortgage while avoiding unnecessary markup of your mortgage interest rate with our free mortgage toolkit.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
