Yield Spread Premium or YSP is the best kept and most scandalous mortgage secret you’ll encounter as a homeowner. YSP is the premium that your lender pays to the mortgage broker for selling you a higher than necessary mortgage interest rate. The more you overpay when refinancing your mortgage, the higher your broker’s kickback from the lender will be.
Par Mortgage Rates
The wholesale mortgage rate you qualified when applying for your loan is known as the “par” rate. Premium or retail mortgage rates include the broker’s markup; here’s an example to illustrate how YSP works. Suppose in this example that you are refinancing your mortgage for $200,000. There are two mortgage rates associated with your new loan: 6.0% and 6.25%.
YSP is paid for by the lender in fixed increments. In this case the par amount you qualified (which your broker will not tell you) is 6.0%. The Yield Spread Premium for this example is .25%. For every .25% you agree to overpay the broker receives a commission of one percent of your mortgage amount. In this example the broker pockets $2,000 because you agreed to pay an above market interest rate.
Most mortgage brokers conveniently omit Yield Spread Premium from the Good Faith Estimate when providing you a quote. If your mortgage is being funded by a wholesale lender and not a bank, this markup of your mortgage interest rate will be disclosed on the HUD-1 statement. YSP can be found on lines 810-811 of the HUD-1 statement.
Avoid Banks and Correspondent Lenders
Banks and Correspondent lenders fund their mortgage loans in the name of their own companies and are not required to disclose this markup due to a loophole in the Real Estate Settlement Procedures Act. The markup by the bank or correspondent lender goes by a different name and is called Service Release Premium. Service Release Premium will not be listed on your Good Faith Estimate or HUD-1 Statement. If you refinance your mortgage with a bank or correspondent lender like E-Loan you’ll never know how much they’ve marked up the par mortgage rate you could have qualified for.
Could Yield Spread Premium be a Good Thing?
There several cases where paying YSP could be used to your advantage with an honest mortgage broker. If you are only going to be keeping the loan for a short time and plan on refinancing again or selling your home, offer to take a higher mortgage rate with YSP instead of paying the broker an origination fee. This will save you cash at closing and if you’re selling your home you won’t be paying this added interest for long.
Another practical application of Yield Spread Premium is an alternative to the “no money down mortgages you see offered.” These loans typically come with very high mortgage rates and fees. You could negotiate with your mortgage broker to let you use Yield Spread Premium to pay your closing costs in exchange for taking a higher mortgage rate.
You can learn more about your mortgage refinancing options, including costly mistakes to avoid by registering for my free mortgage refinancing video tutorial. Register today with no obligation by clicking the DVD image at the top of this page.