Yield Spread Premium (YSP) is a rebate or credit paid by a lender to a mortgage broker for originating a loan with an interest rate higher than the par rate, allowing the borrower to receive a lower interest rate.
Yield Spread Premium refers to a payment made by a lender to a mortgage broker for originating a loan with an interest rate higher than the par rate. The par rate is the interest rate at which the loan would be considered “fair” or at market value, based on the borrower’s creditworthiness and the prevailing market conditions.
In a mortgage transaction, the borrower has the option to pay discount points upfront to lower their interest rate. Alternatively, they can choose a higher interest rate and receive a credit, which can be used to cover closing costs or other fees associated with the loan. The Yield Spread Premium is the credit received by the borrower when they opt for a higher interest rate.
For example, let’s say the par rate for a particular loan is 4.5%. The borrower can choose to pay discount points upfront to lower the rate to, let’s say, 4%. Alternatively, they can opt for a 4.5% interest rate and receive a Yield Spread Premium credit that can be used to offset closing costs.
It’s important to note that while the borrower receives a lower upfront cost, they will end up paying more in interest over the life of the loan due to the higher interest rate. The Yield Spread Premium is a way for lenders to compensate mortgage brokers for bringing them borrowers who choose higher interest rates.
It’s worth mentioning that the Dodd-Frank Wall Street Reform and Consumer Protection Act, implemented in 2014, introduced regulations to address potential abuses related to Yield Spread Premiums. These regulations require mortgage brokers to disclose the existence and amount of any Yield Spread Premium to borrowers, ensuring transparency in the transaction.