BROWSE

Yield Spread Premium

Definition

A yield spread premium is the money or rebate paid to a mortgage broker for giving a borrower a higher interest rate on a loan in exchange for lower up front costs, generally paid in origination fees, broker fees or discount points. This "may [be used to] wipe out or offset other loan costs, like Loan Level Pricing Adjustments."

What is 'Yield Spread Premium'

A form of compensation that a mortgage broker, acting as the intermediary, receives from the original lender for selling an interest rate to a borrower that is above the lender's par rate for which the borrower qualifies. The yield spread premium must be disclosed on the HUD-1 Form when the loan is closed.

Explaining 'Yield Spread Premium'

Mortgage brokers are compensated directly by borrowers when the borrower pays an origination fee, when the lender pays the broker a yield spread premium or a combination of these. If there is no origination fee, the borrower is most likely agreeing to pay an interest rate above the market rate. There is no such thing as a no-cost mortgage for the borrower.


Further Reading


A re-examination of the predictability of economic activity using the yield spread
www.nber.org [PDF]
… Since then, various authors have investigated a variety of alternative interest rates and spreads.1 … yields according to the expectations hypothesis. Both of these interpretations of the yield spread's usefulness for forecasting real output …

The high-yield spread as a predictor of real economic activity: evidence of a financial accelerator for the United StatesThe high-yield spread as a predictor of real economic activity: evidence of a financial accelerator for the United States
link.springer.com [PDF]
… Since then, various authors have investigated a variety of alternative interest rates and spreads.1 … yields according to the expectations hypothesis. Both of these interpretations of the yield spread's usefulness for forecasting real output …

Kickbacks or compensation: The case of yield spread premiumsKickbacks or compensation: The case of yield spread premiums
heinonline.org [PDF]
… Since then, various authors have investigated a variety of alternative interest rates and spreads.1 … yields according to the expectations hypothesis. Both of these interpretations of the yield spread's usefulness for forecasting real output …

Financial predictors of real activity and the financial acceleratorFinancial predictors of real activity and the financial accelerator
www.sciencedirect.com [PDF]
… Since then, various authors have investigated a variety of alternative interest rates and spreads.1 … yields according to the expectations hypothesis. Both of these interpretations of the yield spread's usefulness for forecasting real output …

Determinants of market-assessed sovereign risk: Economic fundamentals or market risk appetite?Determinants of market-assessed sovereign risk: Economic fundamentals or market risk appetite?
www.sciencedirect.com [PDF]
… Since then, various authors have investigated a variety of alternative interest rates and spreads.1 … yields according to the expectations hypothesis. Both of these interpretations of the yield spread's usefulness for forecasting real output …

The information in the high-yield bond spread for the business cycle: evidence and some implicationsThe information in the high-yield bond spread for the business cycle: evidence and some implications
academic.oup.com [PDF]
… Since then, various authors have investigated a variety of alternative interest rates and spreads.1 … yields according to the expectations hypothesis. Both of these interpretations of the yield spread's usefulness for forecasting real output …

Yield spread and term to maturity: default vs. liquidityYield spread and term to maturity: default vs. liquidity
onlinelibrary.wiley.com [PDF]
… Since then, various authors have investigated a variety of alternative interest rates and spreads.1 … yields according to the expectations hypothesis. Both of these interpretations of the yield spread's usefulness for forecasting real output …



Q&A About Yield Spread Premium


How does this affect consumers?

This affects consumers because they end up paying more money than what they should be paying if they were not using brokers to obtain loans.

What is yield spread premium?

Yield spread premium is a form of compensation that a mortgage broker, acting as the intermediary, receives from the original lender for selling an interest rate to a borrower that is above the lender's par rate for which the borrower qualifies. The yield spread premium must be disclosed on the HUD-1 Form when the loan is closed.

Is there any risk associated with YSP?

Yes, there is some risk involved with this type of transaction.

What is YSP?

Yield spread premium is the money or rebate paid to a mortgage broker for giving a borrower a higher interest rate on a loan in exchange for lower up front costs.

How does YSP work?

The lender pays the broker an origination fee, discount points, or other fees to offset the cost of the higher interest rate.

Who pays for this type of compensation?

The borrower pays for this type of compensation.

Is there any other way in which borrowers can pay for yield spread premiums?

Yes, lenders can also pay brokers directly through yield spread premiums or by combining both origination fees and yield spread premiums. If there are no origination fees, it means that borrowers are paying higher interest rates than market rates.

What can happen if you do not get enough yield spread premium from your lender?

You may end up paying more than necessary in closing costs and fees.

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