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Morgage YSP Explained
The Morgage YSP (which stands for 'Yield Spread Premium) is the compensation paid to a broker or bank for securing a loan at a given interest rate above the 'par rate'.
Interest Rate Examples of YSP From a 'Rate Sheet'
6.250% = 1.00 Rebate
6.125% = .750 Rebate
6.000% =.500 Rebate
5.875% = .250 Rebate
5.750% = .000 (Par Rate)
5.500% = .250 Cost
5.375% = .500 Cost
5.250% = .750 Cost
5.125% = 1.00 Cost
YSP Explained
In the above examples of what a 'rate sheet' might display you are shown what the Yield Spread Premium and Costs may be for securing a loan at a given interest rate. So if a Morgage Broker offered you a loan at 6.25% the 'rebate' to the broker would be 1 Point. On a $200,000 loan that would be a cash rebate of $2,000. If the same broker were to offer you an interest rate of 5.75% then this would the 'Par Rate' and, as such, there would be no 'rebate' to the broker. The broker, therefore, would not receive any cash for the loan and, resultantly, would charge you 1 Point as an 'Origination Fee' in order to earn income from the loan. This 1 Point in 'origination' would cost you $2,000. If this broker were to offer you an interest rate of 5.125% then this would come at a cost to the broker of 1 Point. So on a $200,000 loan the broker would have to pay the bank $2,000 in order to obtain that rate for you. Because of this the broker would have to charge you 1 Point ($2,000) just to break even on the loan and then another point to earn any profit from the loan. Together that would be $4,000 in costs to obtain your 'below market rate'.
The primary function of Morgage YSP is to compensate banks and brokers in such a way that allows borrowers to have lower total closing costs. With out YSP the closing costs would increase so it really gives you an option to lower your total costs. In fact, YSP is the very reason 'No Closing Cost' loans are offered today.
Further note that currently only morgage brokers are required to disclose Yield Spread Premium (on both the Good Faith Estimate and the Settlement Statement). Banks and Correspondent Lenders do, in fact, earn a Yield Spread Premium on their loans but simply aren't required to disclose this.
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Morgage YSP Explained - What is a Morgage Yield Spread Premium?
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