If you are a homeowner refinancing your mortgage you never want to overpay for the new loan. To avoid making costly mistakes when refinancing your mortgage it is important to do your homework and research mortgage lenders prior to applying. The type of mortgage lender you choose will affect how much you pay or overpay for the financing. Here are the basics of Yield Spread Premium and how it affects your mortgage loan.
The mortgage marketplace is composed of two parts. There is the primary or retail mortgage market comprised of banks, brokers, and your local and online mortgage lenders. The secondary mortgage market is composed of investors and pseudo-government organizations such as Freddie Mac that routinely buy and sell mortgage debt. When you refinance your mortgage loan the mortgage company or broker you choose is selling you a product, just like a toaster. Once your loan is finalized, the mortgage company will turn around and sell your mortgage to the secondary market. Their profit on the secondary market depends on how much they overcharged you for your new mortgage loan. This is Yield Spread Premium; a fancy term for how your mortgage broker or lender is ripping you off.
The way Yield Spread Premium works is the wholesale lender will provide your mortgage broker or mortgage company with an interest rate guarantee for the loan. The mortgage broker or mortgage company will mark up the interest rate in order to collect a bonus from the wholesale lender. If for instance, you qualify for a 6% interest rate and the mortgage broker quotes you a rate of 6.75%, the Yield Spread Premium or YSP is .75%. The mortgage broker is actually receiving a bonus for overcharging you this amount; they receive one point or 1% of the loan amount for each .25% they get you to overpay for your loan. In this example if you were borrowing $200,000 to refinance your home, the broker would receive a $6,000 bonus for overcharging you!
How can you avoid paying Yield Spread Premium when refinancing your mortgage loan? Register for our free Mortgage Refinance Information guidebook: “Five Things You Need to Know Before Refinancing Your Mortgage” to learn more.
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.
