Yield Spread Premiums (YSP) are points lenders pay for loans with higher interest rates than the par rate. Points are an up-front cost indicated as a percentage of the loan, and the par interest rate is the rate at zero points.
Lenders charge points on rates below the par rate, and Lenders pay points on rates above the par rate. Negative points and rebates are other names for yield spread premiums. A lender might, for instance, offer the same loan at 6.5% with 2 points and at 7.50% with a YSP of 1.5 points in addition to a 7% 30-year fixed-rate mortgage at par.
Mortgage brokers are most frequently connected with a yield spread premium. This is because mortgage brokers charge an interest rate higher than the rate quoted upon the loan by the lender funding the loan. As such, the mortgage is entitled to a commission from the wholesale lender for delivering a higher interest rate than the initially quoted wholesale rate.
The mortgage broker may also charge a borrower an origination fee. However, since the borrower was charged the wholesale rate, the mortgage broker may not have received a commission from the wholesale lender in this situation. Instead, the borrower paid an origination fee directly to the mortgage broker.
Brokers typically receive “points” on loans, yield spread premiums, or a combination of both. They pay these points in cash at closing, thus the borrower will need extra money when making a purchase. When paying points in cash at closing on a refinance, the borrower often receives less cash-out proceeds. To read more on Yield Spread Premium and how it impacts lending, click here.
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