Yield Spread Premium (YSP): What It Is And How It Works

The yield spread premium is a fancy term for the compensation that a mortgage broker may receive from the mortgage lender for selling an interest rate that is above the lender's par rate for which the borrower qualifies. (Don’t worry, we’ll explain in detail what all that means.)

The first thing to understand is the relationship between the mortgage lender, the mortgage broker, and the borrower/home buyer. The broker is essentially the salesperson who acts as the intermediary between the buyer and the lender. Many home buyers seek the services of mortgage brokers in order to get lots of different quotes for their mortgage without having to contact each individual lender. The broker will do the research and present various rates and loan terms to compare based on your mortgage loan amount, credit score and other factors. But this advice and legwork doesn’t come free — the mortgage broker will be compensated, which is where YSPs might come in.

There are two ways that mortgage brokers are typically paid by the borrower. The first is through an origination fee that comes due at closing. However, if your upfront paperwork doesn’t include an origination fee, your broker is likely being paid through a yield spread premium, which means you’ll be paying a higher interest rate than you otherwise would for your loan. (You also may be paying a combination of these two, but make sure that the total of those seems reasonable so you’re not inadvertently paying the broker twice.)

If you’ve heard of a “no-cost” loan, the YSP is likely how they can make that sweet offer.

Does this seem like a bad deal? Not always, and we’ll find out why later.

Wondering if a YSP is for you? The short answer is that it’s usually only a better deal provided it costs less over the life of the loan than the upfront costs would, as determined by how long you intend to hold the mortgage. In other words, if you intend to live in the new home for a short period of time; if you’re planning to refinance; or if you expect a windfall in the near future that would allow you to pay off your mortgage, then a YSP could be for you.

But again, proceed with caution as you consider the financial implications should you not pay off your mortgage loan amount as quickly as anticipated, and the YSP continues to add up as part of your monthly payment. Sometimes it’s best to know the broker fees upfront and pay them, rather than be subjected to an ongoing, never-ending fee.

The real estate buying process can be confusing — and loaded with surprises and uncertainty. That’s why the more you can anticipate up front, the smoother the process will be and the more confident you will feel. The yield spread premium is a perfect example of a variable that deserves a thorough analysis before agreeing to it as an option on your mortgage. And it is also a good example of why you should always work with a lender who is patient in explaining all the details of the mortgage process.

Wondering what other financial issues you may encounter as you head into home ownership? Check out more Rocket HQSM home buying articles to become the most well-informed buyer on the block.