Yield Spread Premiums Can Bite You

The yield spread premium (YSP) is a mystery to most home buyers, but it would pay you to get more familiar with this little misunderstood feature of the mortgage business.

It's the basis for the fee a broker gets for selling a loan above the par rate, or the lowest interest rate a borrower qualifies for. It's a standard industry practice, but it can also be an incentive for abuse.

The larger the yield spread, the more a broker earns, and that can tempt them to steer borrowers to higher interest loans.

A prime, fixed-rate loan at par may earn a broker a fee of one percent or less, but a hybrid adjustable rate mortgage (ARM) can pay four percent or more.

Borrowers can avoid YSP abuse by carefully going over any offer they get and comparing annual percentage rates.

APRs take into account all the one-time fees involved and provide a reasonably accurate picture of costs over the lifetime of a loan. They may be only listed in fine print but they will be disclosed in ads and - by law - must be disclosed before the loan can be finalized.

Remember the old saying, "if a deal sounds too good to be true; it probably is." Although the majority of mortgage brokers are responsible, valuable assets for home buyers, they have no fiduciary responsibility to do their best by clients. Bad actors among them have no qualms about taking advantage of borrowers.

If you're thinking about buying a home and would like to talk to a reputable lender first, contact us. We can refer you to several lenders we've worked with over time, and those who will not try to steer you in the wrong direction on your home mortgage. We'd love to hear your comment below by clicking the comment link.

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