If you are in the market for a new mortgage loan and are looking for refinancing advice to get the best deal for your new mortgage, the best bit of advice I can give you is to avoid paying Yield Spread Premium on your new loan. Never heard of Yield Spread Premium? Well you are not alone; in fact most homeowners have not and it’s gotten so bad that the Secretary of Housing and Urban Development recently stated that Yield Spread Premium is responsible for homeowners in the United States overpaying sixteen billion dollars every year. Here’s what you need to know in order to avoid paying this ridiculous markup when refinancing your mortgage.
Yield Spread Premium: What Is It?
The term Yield Spread Premium or YSP sounds scarier than it really is. In fact, all Yield Spread Premium does is add markup to your mortgage interest rate to give the person originating your loan a bonus. The person “originating” your loan could be a mortgage broker, a local mortgage company in your town, or even the Internet mortgage giant you see advertising on television.
How does this markup work? When you apply for a mortgage the wholesale lender that approves your application qualifies you for a specific mortgage interest rate. Your broker knows this rate but quotes you an entirely different, higher mortgage rate.
Your mortgage broker does this because the wholesale lender pays them a bonus for overcharging you. For every.25% you agree to overpay beyond what the lender approved you, the broker gets a kickback of one percent of your mortgage amount. This “kickback” is paid in addition to the perfectly reasonable origination fee you’re paying the broker for their part in arranging your loan. A reasonable fee to pay for mortgage origination is one percent of your loan amount; although many brokers charge more unnecessarily.
If you agree, unknowingly or otherwise, to pay Yield Spread Premium when refinancing your mortgage you are doubling, often tripling, the commission your broker receives for arranging your loan. Many people think that since the lender is paying the premium and that fee doesn’t come out of their pocket they don’t need to worry about Yield Spread Premium. The problem with YSP is not the fact that this fee is being paid by the lender but the reason these lenders pay the fee. The fee is being paid because you’re agreeing to an above market mortgage rate which can result in higher monthly payments as much as several hundred dollars per month.
Why Do Lenders Pay Yield Spread Premium?
Mortgage lenders reward loan originators for overcharging homeowners because they know that mortgages with above market interest rates bring them a premium profit on the secondary mortgage market. Lenders sell their loans to investors and make the majority of their profits doing so. Your mortgage with an above market interest rate is the icing on the cake; this is why wholesale lenders offer an incentive to loan originators for overcharging people.
Yield Spread Premium Can Be Avoided
Fortunately for you, Yield Spread premium can be avoided. By learning how to recognize this unnecessary markup of your mortgage interest rate you can negotiate with potential mortgage companies and brokers to avoid paying it. You can learn more about recognizing Yield Spread Premium on your Good Faith Estimate and HUD-1 statement, including strategies to negotiate and avoid paying it, by registering for my free mortgage refinancing videos.