Yield Spread Premium
YIELD SPREAD PREMIUM - This is a tactic used by mortgage brokers to make a few extra thousand dollars off your loan. Learn to detect and eliminate YSP from your loan, you'll save tens of thousands of dollars over the life of your mortgage.
Here's how it works...
As a bad credit borrower you are offered an interest rate by your broker - say 7.5% on a $150,000, 30 year-fixed loan . You've had some credit issues in the past few years but are back on your feet financially. This rate seems to be about right considering some deragatory credit in your past.
What you don't know is the lender who is actually funding the loan to the broker has qualified you for 7% interest rate. Repeat! You should be paying only 7% interest!
At 7.5% the amount you pay in interest only (over the life of the mortgage) is $227,280.00
At 7.0% the amount you pay in interest only (over the life of the mortgage) is $208,920.00.*
At 7.5%, that's an extra $18,360 in extra interest payment out of your pocket!
Why Yield Spread Premium Happens
Broker Profit is the only reason. Read this slowly and carefully:The broker will earn a bonus of 1% of the amount of the loan for every .25% he increases the interest rate over and above what you really qualify for.
So when the wholesale lender qualifies you at 7% your broker will offer you 7.5% - half a point more - earning an extra $3000 or 2% x 150,000 ( your loan amount) = $3000 . (It's 2% because he's raised the rate by .5 which is .25+.25)
Most bad credit borrowers never suspect it - because nothing seems "out of the ordinary"...thinking, " I DO have bad credit, I guess I better take this rate...no one else will help me..."
WRONG ! Knowledge is power!
How To Stop YSP
Agree up front that you won't pay YSP.
Agree that you'll see the "Wholesale Lock Sheet" stating the rate the wholesale lender qualified you at.
Agree that your interest rate will be "no more" than what the wholesale lender qualifies you at.
If your broker doesn't agree to do that - simply find another bad credit lender - believe it or not, your loan is a hot commodity and brokers will compete - even if it means cutting out YSP - Brokers are getting a 1% origination fee for their compensation...no need for YSP.
99% of borrowers never even ask about this so it's standard practice in the lending world to freely mark-up interest rates - especially to bad credit borrowers.