Yield Spread Premium (YSP) is a factor of the loan which will affect either the rate you receive or the money going into the loan officers pocket. There are many misconceptions about what YSP really is. Many people think that YSP is a way for brokers or loan officers to simply make more money, and a ton of people have no idea what YSP is altogether.
When I was a loan officer I would always try to educate and inform borrowers about YSP and what it is. I was surprised to find so many people really knew nothing about it.
Even though Yield Spread Premium is way loan officers can make money on a loan it is a much more powerful tool, that if you understand it can work in your, the borrowers, favor. First of all let me clarify that YSP is completely legal as long as it is properly disclosed in your loan documents. Some loan officers will attempt to skim over the documents concerning YSP. If a borrower does not understand YSP it can be difficult to explain it on the spot and this may be the reason they skim over it, or they are trying to make more money with the YSP and do not want you asking questions. A good loan officer will explain the YSP and show you options with your loan.
YSP basically affects the interest rate of your mortgage. When shopping for a rate for you a loan officer will see something like this from the lender or bank.
|4.5%||0% (par rate)|
The YSP percentage is what the bank will pay the loan officer if they sell the loan at that interest rate. So in this case say you sign a lock in agreement for 5.5%. The bank which is funding the loan will pay the loan offer/mortgage broker 1%. So on a $150,000 that equals $1,500.
How you can take advantage of YSP: Now that you know what YSP is you will need to know how to use it to the best of your advantage. Do not say to your loan officer “I know what YSP is and I don’t want to pay it.” YSP is very normal on a loan and using it to work for you is what you need to do. A good loan officer deserves 2% – 2.5% on the loan whether that is up front or on the back. “Discount” loan officers will usually cause you more headaches because of errors and a slow process.
Using the numbers above if you decide to take the 4.5% interest rate with 0% YSP that 1 % will be moved to the front of the loan. Therefor your origination fee will be 2% instead of 1%. Essentially you are paying up front to lower your interest rate to the lowest rate possible. Many times this makes a lot of sense to do because you will save money in the long run by paying lower monthly payments with the lower rate.
You can determine how many months it will take to repay the 1% by doing a simple calculation. Lets use these figures.
- $150,000 Loan Amount
- 5.5% with 1% YSP
- 4.5% with 0% YSP
Hypothetically the payment on the $150,000 at 5% equals $700. The payment on the 4.5% equals $600, but remember it cost you $1,500 up front by paying for that 1% on the front of the loan. The difference between the payments is $100 which means it will take you 15 months to pay the difference of the $1,500. If you stay in your house longer than 15 months then every month you are saving/earning $100.
Difference between YSP and Buying down points: This concept works the exact same when you want to buy your rate down with extra points. The simple difference is that YSP is usually apart of a normal loan and you can learn to take advantage of points and dollar amounts that are already apart of the loan. Buying down points usually means that you will pay an extra percent of the loan to get a rate under the Par Rate (Par rate is the Rate in which there is 0% YSP).