What Is a Yield Spread Premium (YSP)?
Let me tell you directly: a yield spread premium, or YSP, is compensation that a mortgage broker gets from the lender when they sell you an interest rate higher than the lender's par rate that you qualify for. This can sometimes cover your loan costs, so you don't have to pay extra fees out of pocket.
Back in 1999, legislation required that any YSP be reasonably tied to the actual services the broker provides you, the home buyer. It also had to be disclosed on the HUD-1 form at closing. Then, the 2010 Dodd-Frank Financial Reform Bill banned YSP completely to protect consumers after the 2008-09 crisis.
How a Yield Spread Premium Worked
Mortgage brokers get paid by you through origination fees, by the lender via YSP, or both. If there's no origination fee, you're probably agreeing to an above-market interest rate.
Paying a higher rate to compensate the broker isn't always bad for you—it can cut your upfront costs. But remember, there's no such thing as a completely no-cost mortgage. If you skip closing costs or commissions, you'll pay them over time through higher monthly payments.
If you plan to keep the mortgage short-term, a higher rate might be cheaper than big upfront fees. You should always do a cost-benefit analysis before signing anything.
Par Rates and Mortgage Brokers
The par rate is the base interest rate a lender offers based on your loan terms and credit—it's clean, without adjustments like points, fees, or commissions.
When you use an independent mortgage broker, they shop around from various banks and companies for you. For their effort, they get a commission, often as a YSP, which bumps up the par rate. All such adjustments must be disclosed in your loan agreement and on the HUD-1 at closing.
What Is a Mortgage Broker?
Mortgage brokers act as middlemen between you and lenders. They can save you time by handling the search and might find you better rates than you'd get alone.
Are There Disadvantages to Using a Mortgage Broker?
Brokers don't do anything you couldn't handle yourself if you have the time and know-how. A smart shopper might not benefit much. Plus, there's a risk the broker pushes a lender that's better for them, not you.
What Is an Origination Fee?
An origination fee covers the lender's cost to process your application—it's somewhat negotiable, but there's always a processing cost. You can lower it by accepting a higher interest rate, though that could cost more long-term.
The Bottom Line
Brokers earned YSP by getting you a loan above the par rate, with details shown at closing. Laws in 1999 and 2010 aimed to shield you from excessive YSPs.
Key Takeaways
- A yield spread premium (YSP) is additional compensation paid to a mortgage broker for placing a higher-interest loan with a borrower.
- Any YSP will be listed on the HUD-1 form presented at closing.
- The yield spread premium is one of many fees associated with purchasing a piece of property or home.
- In 1999, legislation was passed, designed to protect homebuyers against exorbitant yield spread premium fees.
- In 2010, the Dodd-Frank Act banned the practice of the YSP.
