Mortgage pricing is complex, particularly for the average home buyer who only deals with it once every 5-7 years. One of the most complex fees when obtaining a mortgage is something called Yield Spread Premium (YSP), which is easily missed or misunderstood by a home buyer. Put simply, YSP is the amount of money that a lender pays to a mortgage broker for loans that are made at an interest rate above the Par Rate. What is the Par Rate? The Par Rate is the interest rate being offered by a lender that offers zero YSP. Mortgage brokers can make money directly from fees charged to borrowers, but they can also be paid for their services via YSP directly from the lender. Often your mortgage broker is compensated in both ways. YSP also offers a mechanism for borrowers short on cash to finance some of their closing costs by paying a higher interest rate in the process.
Probably the easiest way to understand what Yield Spread Premium is all about is to look at a fictitious sample of a lender’s wholesale rate sheet. In this example, the Par Rate is 5.0%. If your mortgage broker originates a loan at 5.0%, no YSP is paid. If you pay a slightly higher interest rate, say 5.25%, there is a YSP credit of 0.733% of the loan amount available that can be used to compensate the broker or to pay your closing costs. For a $400,000 loan, this translates into a credit of $2932. The inverse is also true. If you pay an additional 1.35% of the loan amount, you can “buy down” your rate to a below-par rate of 4.75%. All mortgage are priced this way, though most times these rate sheets are not seen by consumers.
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How can Yield Spread Premium be used by home buyers?
There are three ways that YSP can be used in a transaction.
- Buyer pays a higher interest rate so that their mortgage broker receives YSP as compensation on the “back end” of the transaction.
- Buyer pays a higher interest rate so that YSP can be used to pay for closing costs.
- Buyer “pays points” at closing to reduce the interest rate on their loan.
How do I know if I am paying YSP as part of my loan?
Mortgage brokers are required to disclose the payment of YSP on both your Good Faith Estimate and and your HUD-1 closing statement. Banks and other direct lenders do not have to disclose YSP at all. There is considerable controversy over this discrepancy, and many in the industry want the disclosure laws to be the same across both types of lenders. (We agree and believe that both should have to disclose YSP.) However, for now, only mortgage brokers are required to make this disclosure. There is a major flaw in the current disclosure laws that allow the YSP to be disclosed as a range on your Good Faith Estimate. I have seen Good Faith Estimates say that “YSP may be paid to your mortgage broker between 0%-4% of your loan amount.” Clearly that is a huge range and varies from a reasonable deal to a total rip-off. In this case, you won’t see the final YSP until closing, which can lead to abuse of this practice by unethical mortgage brokers.
Should I even be paying YSP at all? Why can’t I just get my loan at the Par Rate?
This is an excellent question. YSP can serve a legitimate purpose in loan transactions by helping borrowers to reduce their cash out of pocket for loan fees or mortgage broker compensation. However, it is a practice that is too frequently abused from the experiences I have had with some lenders. On more than one occasion with our buyers and on personal transactions, I have had mortgage brokers sneak in a big YSP payment to themselves on the closing statement. Sometimes this equates to thousands of dollars and a borrower who is paying a higher interest rate than they needed to. It is easy to hide from unsuspecting buyers since it is not part of the direct fees being charged to them on the closing statement. Don’t be fooled if a mortgage broker tells you that “You are not paying that amount. I get it directly from the lender.” You ARE paying that amount to your mortgage broker via a higher interest rate.
How do I ensure that I am not being taken advantage of through YSP payments to my mortgage broker?
The best way to ensure that you are not taken advantage of is to be diligent and ask questions. An ethical mortgage broker should be able to answer these questions directly when asked.
- How am I paying for your mortgage services and what is the total amount that you charge for helping me with my loan? Do you charge an upfront origination fee or other processing fees? Are you also being paid on the back-end by the lender? If so, what YSP amount will you be making?
- Am I able to get the Par Rate on my loan? If so, what fees will you charge me.
- If your broker shows a “range” of YSP payments on the Good Faith Estimate, ask them to clarify and give you an exact amount. There is no reason they cannot be more specific with this number, though it can change up until you lock your rate.
- At the point you locked my interest rate, what was the Par Rate? Ask to see that day’s rate sheet if needed.
A good mortgage broker does a lot of work when helping you get a loan and they deserve to be compensated. However, borrowers should work with brokers who are upfront and ethical about how they charge for their services, both in direct fees and indirect YSP payments. If a mortgage broker claims that they charge only 1% for their services, they should not be tacking on another 2% via YSP payments. The correct answer in this case is that “I charge 3% of the loan amount for my services. 1% is paid by you at closing and the other 2% is paid to me by the lender as a Yield Spread Premium.”
If you can’t get a straight answer on the fees that you are paying, it is wise to seek an alternative mortgage broker. A trusted real estate agent can help you review your Good Faith Estimate and closing statement to watch for potential mortgage issues.