Yield Spread Premium (YSP) used to be a hot topic in the mortgage industry; brokers would mark up your refinance rates to get a kickback from the lender. Many people think the government banned yield spread premium and that discussion of lender paid compensation is no longer relevant. The fact is brokers can choose to have the lender pay their fee or have the homeowner pay the loan origination fee, making Yield Spread Premium alive and well. Here’s what you need to know about the mortgage industry’s dirty little secret.
How to Pay Less for Mortgage Refinancing
Fees are a fact of life. Any time you take out a mortgage loan, despite those deceptive no fee refinance offers, there are going to be closing costs that you’ll be required to pay. The question becomes, should you pay these fees yourself or let the lender pay them for you? Brokers prefer lender paid compensation because their commission can be higher; however, if you allow the lender to pay your loan origination fee you’ll be accepting much higher refinance rates.
When the lender pays your origination fee the broker receives a percentage of your home loan as a commission for arranging your refi. Your broker could get two percent of your home loan amount for arranging the transaction. If you opt for this type of lender-paid mortgage refinancing you’ll be stuck with a higher interest rate as a tradeoff.
Here’s an example to illustrate how this works:
Mortgage Refinancing with a 30-year fixed rate:
Par Rate: 3.75%
(Par is a wholesale refinance mortgage rate without markup or points)
Offered (think retail) Rate: 4.25%
In this instance you qualified for a mortgage refinance rate of 3.75%; however, the markup allowing for the broker origination fee gets you an interest rate of 4.25 percent. This is still Yield Spread Premium; the only thing that’s changed is that the broker cannot charge you an additional fee. This type of transaction is what you’ll see advertised as a no fee refinance or no closing cost home loan.
If you opt to have the broker fee and closing costs paid by the lender your refinance mortgage rates go up twice, once to pay the broker commission and twice to cover your closing fees.
You’ll find this on your Good Faith Estimate as a lender credit used to pay your settlement charges. What it’s not saying is that your refinance rates are much higher than they could be if you had paid the closing costs yourself. Is it worthwhile? If you don’t have the cash on hand for mortgage refinancing and are still paying six percent or higher it might be; however, in the long run you’ll be paying a lot more than if you had just paid the fees yourself. If you want the lowest refinance rates from today’s best mortgage lenders like Quicken Mortgage and Amerisave, you’ll want to pay these fees yourself.
If you’re only planning on staying in your home for a short-while and don’t get stuck with a prepayment penalty, lender-paid compensation could save you a ton of cash. The problem is that most lenders are wise to this strategy and include those pesky prepayment penalties, negating any benefit you’re getting from having the lender pay your closing costs.
You can learn more about paying less for mortgage refinancing by avoiding unnecessary fees and markup by checking out my free Underground Mortgage Videos.
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.
