Monday May 22, 2017

Yield Spread Premium

What is the yield spread premium and how does it cost me moneyThe Yield Spread Premium is a payment by the lender to your mortgage broker for having the consumer agree to a higher interest rate then what is known as par.

Par is the interest rate provided by the lender to the mortgage broker for zero cost.  Meaning the broker will receive no additional (hidden) payment from the lender for the interest rate being offered to you.

Only mortgage brokers disclose the YSP (and usually only because it's the law).  Both mortgage bankers and banks/lenders do not usually disclose this fee voluntarily to consumers. Be assured it's still there.  The law just doesn't make them disclose it.

Example of a typical YSP - par for the broker is 6% and the upfront fees for the 6.0% and 6.5% loan are equal -
  1. 5.50% - YSP for the mortgage broker is -2% - To receive this rate it would cost you an additional $6000 on a $300k loan above and beyond all other fees and is usually charged as a discount  or point fee.
  2. 6.00% - YSP for the mortgage broker is 0% - This would be what is called par in the industry: the broker will receive nothing on the back-end and you would pay no discount points to receive this rate.
  3. 6.5% - YSP for the mortgage broker is 2% or more - This rate would make the broker an additional $6000 on a $300k dollar loan, payable when the loan closes from the lender to the mortgage company.
These are some of the more prevalent ways a broker can use YSP, either to help or hurt you
  1. Unfortunately,  what seems to be the easiest way to charge this YSP is for the loan officer to wait until you're deep into the loan process.  Then the loan officer comes up with reasons why he has to raise the interest rate in order to complete the loan.

    This can be one of the dirtiest tricks a broker can pull to try and raise his/her profit on the loan.  The loan officer knows most borrowers have a fear of not closing the loan on time and the borrower believes they either don't or think they don't have enough time to change brokers.

    There "are" legitimate reasons as to why your rate can be raised in the middle of the loan process.  Actual and unforeseen problems with debt ratios, income or cash on hand verification, credit issues, problems with the appraisal, changing from one loan program to another.

    Anyone of these can contribute to a sudden change to the interest rate you were initially provided whether or not the interest rate was locked.  And, the biggest reason this occurs is because the borrower over estimates any of the above or the problem did not show up in the initial paperwork.
  2. If you're short on closing cost the loan officer can charge a higher interest rate and use the YSP he receives from the lender to cover all or most of your closing cost.
  3. Adding a  pre-payment penalty to a loan will always earn a loan officer a higher YSP.

If you are currently or have dealt in the past with a mortgage broker, look for the YSP on the second page of your HUD1 Settlement statement (final breakdown of fees is given to you at your signing for the loan.

Usually this is done by a title company or equivalent).  On that second page look for Yield Spread Premium (YSP).  This is what you paid the loan officer/mortgage company in addition to an origination fee and/or discount fee. 

Many mortgage professionals will tell you something like "your not paying this fee, this is what we receive from the lender for doing your loan".

Don't believe it for a second!

The "only" reason they are receiving this payment from the lender is because they charged you a higher interest rate than they could have.

The loan officer has a choice when giving you the rate for say a $300k loan for your particular situation.  If he chooses 6% he makes zero percent on the YSP, but if he can convince you one way or another, to take 6.5%.

You would then be paying an additional 2.0% of the total loan paid to him by the lender. 

That would come out to be an additional $6000 for the mortgage company, and the loan officer would normally take $2400 - $5400 of that in commission for himself.  It's the loan officers job to make as much money as he can for both himself and his mortgage company. 

If you appear to be oblivious about the process you can bet you're paying the loan officer top dollar one way or another.

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